E-Procurement From Strategy to Implementation

e-ProcurementFrom Strategy to Implementation

fm_title.fm Page i Friday, April 6, 2001 11:07 AM

F

INANCIAL

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IMES

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RENTICE

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ALL

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OOKS

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21st Century Business: Managing and Working in the New Digital Economy

Aswath Damodaran

The Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy Companies

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Dale Neef

E-procurement: From Strategy to Implementation

John R. Nofsinger

Investment Madness: How Psychology Affects Your Investing…And What to Do About It

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e-Procurement

Prentice Hall PTROne Lake StreetUpper Saddle River, NJ 07458www.phptr.com

From Strategy to Implementation

Dale Neef

fm_title.fm Page iii Friday, April 6, 2001 11:07 AM

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Editorial/Production Supervision: PATTI GUERRIERIAcquisitions Editor: TIM MOOREDevelopment Editor: RUSS HALLMarketing Manager: TC LESZCZYNSKIManufacturing Buyer: MAURA ZALDIVAREditorial Assistant: ALLYSON KLOSSCover Design Director: JERRY VOTTACover Design: NINA SCUDERIInterior Design: WEE DESIGN GROUP

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In an increasingly competitive world, it is qualityof thinking that gives an edge. An idea that opens newdoors, a technique that solves a problem, or an insight

that simply helps make sense of it all.

We must work with leading authors in the fields ofmanagement and finance to bring cutting-edge thinking

and best learning practice to a global market.

Under a range of leading imprints, including

Financial Times Prentice Hall

, we create world-classprint publications and electronic products giving readers

knowledge and understanding which can then beapplied, whether studying or at work.

To find out more about our business and professionalproducts, you can visit us at www.phptr.com

FTPH_FM.fm Page i Thursday, April 5, 2001 8:01 AM

fm_title.fm Page vi Friday, April 6, 2001 11:07 AM

E-PROCUREMENT

Table of Contents

vii

Preface

xi

Chapter 1 The New World of Business-to-BusinessE-Commerce

2

Is It for Real?

5

The Unique Nature of B2B E-Procurement

7

Dragging Their Feet

11

Is B2B 4 U?

15

Chapter 2 The Fundamentals of Procurement

24

Indirect Procurement: ORM Versus MRO

26

A Day in the Life of a Typical Procurement Scenario:Today

29

Select Goods

29

The Requisition Process

30

Waiting for Approval

30

Creating the Purchase Order

30

Neither Direct nor Indirect—Just E-Procurement

31

E-Procurement Vision of the Future: Tomorrow

32

Chapter 3 Understanding the Strategic Nature ofE-Procurement

36

Back-End Systems and the Modern Organization

39

The Strategic Nature of E-Procurement

41

Strategic Focus of the E-Procurement Initiative

43

Chapter 4 Making the Business Case for E-Procurement

46

Process Efficiencies

47

Process Automation Savings

48

Compliance

50

Leverage

54

Strategic Sourcing

55

The Changing Role of Procurement Specialists

58

Chapter 5 The E-Procurement Software Landscape

60

The Story So Far

61

E-Procurement Software Specialists

65

ERP Suppliers and E-Procurement

67

Translation and Connectivity

69

Payment Systems

71

Finding Your Way Through the Minefield

72

TABLE OF CONTENTS

NeefTOC.fm Page vii Monday, April 9, 2001 9:53 AM

viii E-PROCUREMENT

Table of Contents

Chapter 6 The Architecture of Web-Based Procurement

74

Sell-Side One-to-Many: The Storefront Model orShopping Mall

75

Buy-Side One-to-Many Model

77

Buy-Side Desktop Requisitioning

79

Buy-Side Central Procurement

79

Independent Portal and Online Trading Communities

80

Vertical E-Markets and Marketplace Creators

82

Horizontal E-Markets

85

Auctions

88

Application Service Providers

93

The Future of E-Markets

95

Chapter 7 Standards

100

From EDI to XML

101

Chapter 8 Government and E-Procurement

108

Advantages Will Not Be in Savings Alone

109

Government-to-Business E-Commerce

111

The Military

115

Chapter 9 The Future of E-Procurement

118

Standards

119

Enterprise Versus E-Market Models

119

Direct Versus Indirect

120

Consolidation of E-Market Verticals

120

Single-Solution Suppliers

122

Vendor Rationalization

125

The Changing Role of Procurement Specialists

125

Government Driven

126

Chapter 10 Assessing the Pros and Cons of E-Procurement

128

The Pros

129

For Buyers

129

For Sellers

130

The Cons

131

System-to-System Integration Issues

131

Initial Investment Costs

133

Security, Trust, and Supplier-Buyer Relationships

134

Fundamental Changes to Procurement Business Processes and Company Culture

137

Why E-Procurement Initiatives Fail

138

NeefTOC.fm Page viii Monday, April 9, 2001 9:53 AM

E-PROCUREMENT

Table of Contents

ix

Chapter 11 Guiding Principles for Developing anE-Procurement Initiative

140

Ground Rules for an E-Procurement Project

142

Executive Sponsorship and Participation

143

Integrate E-Procurement Projectwith E-Business Strategy

144

A Legitimate Business Case

145

Guiding Principles

147

Strong Change Management Program

147

Redesign Business Processes

148

Other Key Issues to Consider Before Starting

150

Integration Issues

150

Involving Suppliers and Vendors

151

Bringing in Consultants

152

New Responsibilities for Consultancies

154

Chapter 12 Structuring the Project: Phases of anEnterprise-wide E-Procurement Initiative

160

Strategy Phase

161

Program and Project Planning

164

Strategic Direction, Guiding Principles, and Project Goals

164

The Case for Action

165

Target Performance Measures

165

The Supplier Side

166

Resources and Critical Areas of Concern

167

Project Readiness Assessment and a Plan of Work

168

Analysis and Design Phases

169

Collecting Information to Confirm the Business Case

169

Confirming Supplier Support and Compatibility Levels

169

Redesigning Business Processes

170

Completing an Implications Analysis on Changes toActivities and Employee Jobs

170

System Selection Phase

172

Cost

172

Functionality

173

Integration and Interoperability

173

Implementation Phase

174

Customer Support

175

Future Viability of the Group

175

Chapter 13 The Executive E-Procurement Strategy Workshop

176

Step One: Defining and Agreeing on Fundamentals

178

Step Two: Education on E-Procurement

180

Step Three: Reviewing the Business Vision

180

Step Four: Understand the Procurement Business Case

181

NeefTOC.fm Page ix Monday, April 9, 2001 9:53 AM

x E-PROCUREMENT

Table of Contents

Step Five: Developing Scenarios 183

Step Six: Project Readiness Review 184

Chapter 14 Creating an Effective Plan of ChangeManagement 186

Project Structure and Staffing 189

The Executive Steering Committee 189

E-Procurement Program Manager 189

Technical Program Director 191

Nontechnical Program Director 191

The Core Team 192

Subject Matter Experts and Supplier Representatives 194

Creating a Business ChangeImplementation Plan 194

Index 199

NeefTOC.fm Page x Monday, April 9, 2001 9:53 AM

E-PROCUREMENT

Preface

xi

Business people these days are becoming weary of new fads, move-ments, and revolutions, and rightly so. We have, in less than adecade, been taken through such “revolutionary” transformations astotal quality management, business process reengineering, enter-prise resource planning, activity-based costing, and retail e-com-merce. Companies have downsized, outsourced, empoweredemployees, shifted processes and organizational structures from ver-tical to horizontal, completed strategic sourcing initiatives, and pur-chased IT systems (often on the basis of dubious return oninvestment), with investments amounting to millions of dollars.And, of course, they have paid management consultants and soft-ware companies many millions more for advice on implementationand change management.

Yet, completing business-to-business transactions over theInternet is genuinely something very different. The unexpectedemergence of the Internet as a tool for business has meant that wehave once again been thrown inescapably into the fray of majorinvestment and change. As I have argued before

1

it is all part of anaccelerated pace of change that will bring about a fundamentalrestructuring for all industries, worldwide, and participation isessential for the survival in the new economy.

I have written this book about e-procurement in part because Ibelieve that there has been a mistaken emphasis on e-commerce(electronic retailing) in our approach to the use of the Internet.Swayed by the activity around online retailing—the fortunes to bemade with dotcom startups, the venture capital that was available,the relative ease in which a Web site for retail sales could be built, themassive coverage of the subject by the business press—we have failedto understand that e-commerce is a relatively unimportant step inthe development of the Internet. It is a vital part of an overall e-busi-ness strategy, of course, but online retailing—unless it is fully inte-grated into the supply chain—is simply a mildly effective extensionof the sales process. Moreover, expanding revenues, given the mar-gins made in most industries, is far less effective as a strategy than isfundamentally and permanently reducing major costs—somethingthat affects the bottom line directly.

The real value of the Internet, as many companies are beginningto experience first hand, comes instead from business-to-business,buyer-vendor transactions that include electronic procurement and

PREFACE

NeefPref.fm Page xi Monday, April 9, 2001 9:52 AM

xii E-PROCUREMENT

Preface

full integration of the electronic supply chain from customer to sup-plier. In fact, as electronic procurement and supply chain softwarecontinue to evolve, the relative value to companies of online retailingwill almost certainly continue to shrink in relation to the enormouscost savings and fundamental restructuring of companies that willcome about as a result of the evolution of Internet-based business-to-business activity.

The purpose of this book is threefold. First, it is simply toexplain to those who have not previously dealt with the area of pro-curement the fundamentals involved with purchasing and replenish-ing materials. Though certainly not as glamorous as many (in fact,most) areas of business, procurement—whether for everyday officesupplies or for materials used directly in the manufacturing pro-cess—is nonetheless an enormous expense for companies, large andsmall, and in every industry. In fact, so enormous is the expense andpotential savings that e-procurement should from this time forwardbe seen as an integral part of your company’s overall e-businessstrategy. I hope that the book can therefore serve as a primer forintroducing the importance of the subject to organizational leadersand for elevating the subject from the tactical to the strategic.

The second purpose of this book is to explore the phenomenonof the electronic trading communities—the volatile and fast-growingarea of online e-markets, auctions, reverse auctions, andexchanges—that is effectively revolutionizing the relationshipbetween buyers and sellers in virtually every industry, worldwide. Abattle for control over the influence and utility of these onlineexchanges is now being waged between a powerful group of softwarecompanies, industry-leading alliances, and third-party applicationservice providers in a volatile mix of competition and collaborationthat is at once both explosive and effective, and that will eventuallyaffect virtually every supplier and buyer in the economy.

And finally, this book is intended to help managers, executives,and other organizational leaders to take the first important stepsnecessary for defining and implementing their e-procurement andoverall e-business strategies. I have therefore devoted several chap-ters to the development of strategy, to project approach and struc-ture, and to the activities necessary to creating an effective plan ofchange management. As many have learned from past lessons withenterprise resource planning systems, business benefits come notonly from the functionality of the software system, but often more

NeefPref.fm Page xii Monday, April 9, 2001 9:52 AM

E-PROCUREMENT

Preface

xiii

importantly, from changes in the way employees do their work. Justas e-procurement should be seen as strategic rather than tactical, weshould also avoid seeing it solely as a technical solution. After all, tobe effective, the behavior of employees in the purchasing depart-ment (not to mention the behavior of those employees throughoutthe organization who today buy “off contract” with little concern forprice or administrative overhead costs) will need to change dramati-cally. For this reason, I have dedicated several chapters specifically to“lessons learned” around project and change management, relatingat a more detailed level some of the leading techniques that haveworked well for successful companies and consultancies in the recentpast. I hope these will be useful to the soon-to-be managers of enter-prise-wide e-procurement initiatives.

I should, at the outset, admit that although the book examinesthe basic software platforms and major players in the e-procurementindustry, the business-to-business e-procurement marketplace isextremely volatile. Software vendors merge, realign, and bring for-ward new offerings on an almost continuous basis. Electronic mar-kets and auction sites are multiplying rapidly, while at the same timebeginning to falter and collapse, as competitors vie for dominance.The models for e-procurement—enterprise-based, outsourced, ornetworked—are all in a state of evolution.

In short, it is a marketplace that is constantly changing andevolving, and therefore this book is by no means the last word on thesubject. But the fundamental principles behind electronic procure-ment are sound and well understood, and it is critical for organiza-tional leaders to understand these principles, the major players, themarketplace, and the key issues in order to be in a position to createan e-procurement strategy with confidence. E-procurement initia-tives are seldom simple, compared with building a Web page, buttheir potential for cost savings are enormous, and few companieshave the luxury of waiting for a much more settled marketplacebefore acting.

ENDNOTE

1. Neef, Dale,

A Little Knowledge is a Dangerous Thing

(Butterworth-Heinemann, 1998) and

The Knowledge Economy

(Butterworth-Heinemann, 1997).

NeefPref.fm Page xiii Monday, April 9, 2001 9:52 AM

NeefPref.fm Page xiv Monday, April 9, 2001 9:52 AM

e-ProcurementFrom Strategy to Implementation

NeefPref.fm Page xv Monday, April 9, 2001 9:52 AM

In an increasingly competitive world, it is qualityof thinking that gives an edge. An idea that opens newdoors, a technique that solves a problem, or an insight

that simply helps make sense of it all.

We must work with leading authors in the fields ofmanagement and finance to bring cutting-edge thinking

and best learning practice to a global market.

Under a range of leading imprints, including

Financial Times Prentice Hall

, we create world-classprint publications and electronic products giving readers

knowledge and understanding which can then beapplied, whether studying or at work.

To find out more about our business and professionalproducts, you can visit us at www.phptr.com

FTPH_FM.fm Page i Thursday, April 5, 2001 8:01 AM

CHAPTER

Objective

CHAPTER

2

1

The New World of Business-to-Business E-Commerce

Business-to-business (B2B) e-commerce—the area that

encompasses electronic buying and selling transactions

between organizations and in which e-procurement is a

central function—has become central to doing business

effectively. Done well, it can help your company achieve

enormous cost savings and productivity improvements.

�

B2B e-commerce has replaced business-to-consumer e-commerce as the fastest growing area of e-business in the economy.

�

E-procurement is the most important area of development in the B2B e-commerce arena.

�

E-procurement will fundamentally restructure the way in which an organization purchases goods.

�

E-procurement is coming, but for most companies their online procurement capabilities are still limited to occasional and uncoordinated shopping online for office materials.

ch01.fm Page 2 Monday, April 9, 2001 9:17 AM

3

n the future, our grand-children may ask us to tell

them what life was like beforethe Internet in the same waywe marvel at how our grand-parents managed before elec-tricity or television. Yet today,it is not obvious that theimpact of the Internet hasbeen as revolutionary as wehave been lead to believe. This is, in part, simply because e-commerce—online retailing—has proven to be less dra-matic in its effect on company sales, or on our everydaylives, than predicted. In fact, as we now realize, there weremany mistakes made in the frenzied dotcom era that is nowdrawing to a close, for which many start-ups (and the con-sultancies and venture capitalists that supported them) aretoday paying the price. But among those errors, the worstmistake that industry generally has made is that in ourenthusiasm for Web pages and online retail sales, we haveignored the far more revolutionary aspect of the Internet—business-to-business e-procurement.

It is true, electronic procurement may seem less glamor-ous and, in many ways, more difficult to initiate, than onlineretailing. But, in fact, e-procurement (business-to-businesselectronic trade) has a far greater potential for cost savingsand business improvement than online retailing or enter-prise resource planning systems, and will permanently andfundamentally reform the way we do business in the future.

There is no doubt that e-commerce has been a boon tothe stock exchange and has attracted vast amounts of venturecapital, enormously boosting the earnings of advertisingagencies, newspapers and billboards, executive recruiters,and, temporarily, at least, consultants. But as the bubbleburst, it became apparent that the one group that had not

I Nearly 80% of organizations that have rushed to establish Web sites for online retailing have failed to invest in the purchasing and distribution systems that make delivery of their products possible.


4 E-PROCUREMENT

chapter 1

benefited were the employees and investors in the dotcom companiesthemselves, which are, at the time of press, in virtual free fall.

In fact, a recent study by British Telecom reveals that nearly 80%of organizations that have rushed to establish Web sites for onlinebuying have failed to invest in the purchasing and distribution sys-tems that make delivery of the products possible. Instead of focusingon using the new Web-based technologies to streamline their supplychain, senior management of companies have focused on providingWeb sites that promise much, but far too often, can deliver very lit-tle. This myopic focus on Web sites and e-commerce meant thatmany of the dotcom firms never came near profitability. Etoys, forexample, lost more than $4 on every order. Other online start upssuffered even more. Drugstore.com lost over $16 on each non-pre-scription item they delivered.

1

The entire online buying phenomenon has certainly succeeded inraising our expectations as customers to a level of near-instant gratifi-cation, with demands for ever-wider availability of goods, deliveredcheaper and faster than ever before. But this combination of ever-greater expectation and consistently disappointing results—who doesnot have a story about the flowers that were never delivered to theirmother-in-law, the books that arrived six weeks late, or the lampshade that was left in a package on the front steps in the rain—has leftmany customers (and increasingly, investors) skeptical about thehyperbole of the press and the true value of online retailing.

But in many ways and for some time—at least, from an eco-nomic point of view—we have realized that providing a way for thepublic to buy items online was little more than an electronic exten-sion of the sales process. There is nothing more revolutionary, oncewe stop for a moment and reflect, about ordering a book or flowersonline than there is about ordering them over the telephone.Although having access to brochures online is convenient, and beingable to send family photos electronically to friends is fun, manywould argue that e-commerce has actually done little to change thenature—or more importantly, to improve the profitability—of thevast majority of “bricks and mortar” organizations.

However, just as enthusiasm for huge investments in e-com-merce is beginning to wane, interest in a new area of e-business isbeginning to grow. Business-to-business (B2B) e-commerce—thearea which encompasses any electronic transaction between organi-zations and in which

e-procurement

is a central function—is set to


E-PROCUREMENT


5

become a major area of interest for all types of organizations.Already, B2B e-commerce accounts for more than ten times the dol-lars spent in consumer-based e-commerce, and even more thanretail e-commerce, B2B is being touted as likely to produce enor-mous cost savings and productivity improvements for organizationsand for the economy as a whole.

IS IT FOR REAL?

What is the scope and impact of this B2B revolution? Is it for real,or is it just more of the hyperbole that we have been witnessing withe-commerce over the past two years?

Just as with e-commerce, estimates on the effect of B2B varywidely. Gartner Group forecasts that global B2B e-commerce will reach$4 trillion by 2003—this, compared with less than $400 billion in busi-ness-to-consumer (B2C) e-commerce online sales

2

(see Figure 1.1).Similarly, AMR points out that the manufacturing sector accounted for$96 billion of Internet-based commerce in the U.S. in 1999, and thisshould grow at an annual rate of 78% to reach $1,700 billion by 2004.

3

Goldman Sachs predicts that B2B e-commerce will grow in the U.S.from $39 billion in 1998 to $1,500 billion in 2004 (out of a global totalof $3,200 billion), at an annual growth rate of nearly 84%.

4

For most of us, these are simply large numbers that tell us verylittle. But there are other, more meaningful ways of assessing thepotential impact of e-procurement. A recent study by GoldmanSachs estimates that online purchasing could save firms varying

0

500

1000

1500

2500

3000

North America

Europe

Asia Pacific

Japan

Latin America

1998

2004

2002

2000

2000

$bn

Figure 1.1 B2B E-commerce forecast by region. (Source: The Gart-ner Group from “Competition Rules Apply,” The Financial Times.)


6 E-PROCUREMENT

chapter 1

amounts, from a mere 2% on procurement costs in the miningindustry to up to 40% in areas such as high-tech manufacturingand electronic components. In a study boldly entitled “The Shock-ing Economic Effect of B2B,” the authors of the Sachs study assertthat the relative effect of B2B commerce on advanced economieswill far outstrip the meager efficiency advances provided by IT sys-tems to date. B2B e-commerce “is probably,” they conclude, “thesingle biggest macroeconomic shock to hit the world in the last 40years or so.”

5

That may be overstating the case a bit, but in fact their estimatesdo seem shocking, with B2B e-commerce predicted to boost the levelof productivity in the rich national economies by an average of 5%in the next decades—an extraordinary addition to the national GDPgrowth rate of .05% per year.

6

The Goldman Sachs study estimates that European nations,Britain, and Japan stand to see similar productivity gains throughthe adoption of online purchasing. In Britain, the market for officeequipment alone is estimated to be around $33 billion. In fact, if justsmall and medium-sized companies alone in Britain were to use theInternet to buy indirect materials, it is estimated that the savingswould total some $36 billion a year, with an overall yearly productiv-ity boost of nearly 2% of GDP.

7

As

The Economist

points out, “If therewards from IT are significant in America, the gains in Europe,Japan, and many emerging economies could be even bigger. If so,this could yet prove to be the biggest technological revolution everfor the world as a whole.”

8

AMR Research has made similar studies and reached similar (eventhough couched in less apocalyptic language) conclusions. They pre-dict that B2B e-commerce in the U.S. alone will reach some $5.7 tril-lion in the next three years, which, if true, would account for nearly29% of all commercial transactions. They estimate that as softwareofferings mature and companies of every type move toward purchas-ing indirect goods—office supplies, janitorial services, and so on—online, most companies adopting e-procurement will be able toassume at least an 8% reduction in the cost of purchasing, saving U.S.companies some $82 billion by 2004. Once manufacturing and distri-bution companies begin adopting e-procurement systems and pro-cesses for their direct materials—those materials involved in themanufacturing process itself—the benefits to companies and theeconomy leap enormously, to an estimated savings of $229 billion.

9


E-PROCUREMENT


7

What is more, in order to keep this potential growth in perspec-tive, it is important to reflect that we are only at the beginning of theInternet revolution, and some industry watchers would suggest thatthe economy has not yet had time to begin to adjust to the revolu-tionary nature of Internet-based business. After all, although it mayseem that we have been living with the Internet for decades, theWorld Wide Web is only ten years old, and browser technology before1995 was rudimentary. Despite talk of global supply chains, only 6%of the world is online today, and although many estimates set thenumber of users worldwide at over a billion in the next four years, asyet, there are only some 350 million people online worldwide.

There is no doubt a good deal of truth to the assertion that B2Be-commerce is still highly immature. Economists are quick to pointout that technologies like the Internet are really only at the beginningof their development (see Figure 1.2), where growth is actually rela-tively slow by comparison with computing or other more maturetechnologies generally. But just as with these other technologies, onceaccepted and broadly adopted, their usage will expand exponentially.

And as you will see later in this chapter, the potential of B2B isonly now being recognized by a few large and fairly sophisticatedfirms. The promise is all in the future.

THE UNIQUE NATURE OF B2B E-PROCUREMENT

So, what is it about the nature of B2B e-commerce that gives rise tothis magnitude of change and savings? The answer seems to be that,

Market

Time

Computing

The Internet

Figure 1.2 The technology curve. (Source: “The New EconomySurvey,” The Economist.)


8 E-PROCUREMENT

chapter 1

unlike online e-commerce sales that may or may not expand reve-nues,

B2B e-commerce will fundamentally restructure the way inwhich an organization purchases goods, resulting in significant processefficiencies and permanently lower costs

.

Organizations are findingthat the more they can integrate e-procurement processes and sys-tems directly into their supply chain, the greater the effect in termsof cost savings and process improvement. Those improvementscome about in several broad areas.

First, online procurement significantly reduces the day-to-daycost of purchasing. Electronic procurement of goods is not only farless expensive but far more efficient than the current manual, labor-intensive phone and fax-based purchasing process. Research indi-cates that 40% of the total cost of purchasing materials comes fromtransaction costs associated with processing and managing theorder.

10

Not only is it faster and cheaper, but online procurementpromises to reduce invoicing and ordering errors, on average, by upto 2%. This can all add up to considerable savings when these totaltransaction costs are taken into account. For those (at this point,usually large and albeit sophisticated companies) that have success-fully adopted e-procurement, it is not unusual to see process costreductions of up to 90%, with additional reductions in price(through contract buying and via e-exchanges) of up to 11% for thedirect costs of all goods and services that they buy.

11

3M provides a good example. Traditionally, the company has

created hundreds of thousands of purchase orders for everydayoffice materials at an average cost of some $120 each. These ordersaccounted for some 70% of the volume of the company’s total pur-chasing transactions (and, therefore, effort), and yet amounted toonly 2% of the total purchasing dollars spent. Each requisition tookfrom one to three days to process, and nearly a third of all ordersrequired rework. Even then, an estimated 45% of purchases weremade in violation of prearranged contracts with the vendors.

Over the past two years, 3M has implemented an e-procurementsolution that has greatly reduced these transaction costs, almostentirely eliminating rework and errors, and has cut the internalorder cycle time, including approval, to less than an hour. They esti-mate that the improvements will drop the average cost per purchasefrom $120 to $40.

12

It is a good, but not unusual, example of themagnitude of savings to be made.

A second key area of potentially revolutionary improvement canbe seen in the rapid development of online electronic auctions and


E-PROCUREMENT


9

e-marketplaces. These provide an electronic forum in which a largenumbers of buyers and sellers can meet and exchange informationand bids online, greatly expanding sales opportunities for sellers,and often greatly reducing the purchase price for buyers of bulk ordifficult-to-find items. There are additional benefits for small andmiddle-size firms—which normally lack buying power by them-selves—in that the marketplace intermediaries essentially negotiatediscounts on their collective behalf, creating economies of scale nor-mally reserved for large and powerful firms.

These electronic marketplaces have developed explosively since1999, and there are now more than 1,000 (serving as an electronicexchange for everything from wine to bananas, steel to chemicals,automobiles to aerospace) in the U.S. and more than 250 in Europe.In fact, research carried out by Deloitte Consulting in July 2000identified 1,447 separate electronic marketplaces that had beeneither launched or announced, and at least in the short term, thesenumbers will continue to grow. If they continue at their presentgrowth rate, Net Market Makers estimates that there will be as manyas 20,000 by 2003.

Although most analysts agree that there will be a severe “shakeout” of exchanges through mergers, acquisitions, and failures in thenext several months (Deloitte predicts no more than 400 e-market-places will still be trading in four years’ time), the development ofthese electronic markets promises to revolutionize the way compa-nies purchase materials worldwide.

13

One of the most important and economically curious develop-ments in this area, has been the collaboration of large and powerfulindustry leaders working together to sponsor vertical industry e-marketplaces and trading communities. Known as

market creators,

these collaborative exchanges are backed by levels of industry knowl-edge and financial clout that promise to drive their supplier net-works quickly toward adopting e-procurement policies. One highlypublicized example is Covisint, a joint electronic exchange beingsponsored by GM, Ford, Daimler Chrysler, and Renault-Nissan,with a turnover of $250 billion and 60,000 suppliers. Major tier-onevendors, such as Dana Corporation, one of the world’s largest sup-pliers of parts for automobile manufacturers, have already agreed toparticipate, hoping that the Covisint exchange will provide themwith a primary link directly into the supply chain of major automanufacturers. Covisint estimates that once all of their suppliers are


10 E-PROCUREMENT

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connected online, they can achieve cost reductions of up to 14% onthe production of the average car.

Again, the advantages accrue from a combination of greater effi-ciencies and lower negotiated prices. And the important thing tonote—at least from an economic point of view—is that while pricereductions simply shift money between buyers and sellers, greaterefficiencies create a permanent gain in productivity, and thereforeprofit, for both parties and the for the economy as a whole.

Finally, and possibly most importantly, online procurement—and eventually totally electronic materials management—can com-pletely revolutionize a manufacturing or distribution firm’s supplychain, making a seamless flow of order fulfillment information fromcustomer to supplier (see Figure 1.3). This was something that wasinconceivable just a few years ago when Enterprise Resource Plan-ning (ERP), Customer Relationship Management (CRM), and sup-ply chain systems remained physically and logically separated andpiecemeal.

It was only with the shift from client-server to Web-basedtechnologies that a true consolidation of data—a single, extendedenterprise-system approach—became possible.

Advanced Planning& Scheduling Systems

E-commerce

Knowledge Management& Data Warehousing

E-procurement

SFA

CRMSuppliers Consumers

SellERP

Store

Make

MoveBuy

Figure 1.3 Components of collaborative fulfillment and anintegrated e-business strategy.


E-PROCUREMENT


11

This can greatly improve efficiency in several obvious ways. First,better information concerning customer demand means that firmscan move much closer to the ideal of Just-In-Time (JIT) manufactur-ing and greatly reduce the amount of excessive inventories andexpensive safety stock. Electronic replenishment also eliminates themultiple, inefficient layers within a firm’s supply chain. Not only doesa fully-integrated online supply chain system allow firms to purchasegoods from their vendors easily and accurately, on pre-agreed terms,but it provides them with opportunities to communicate changes indesign and manufacturing requirements quickly along the full lengthof the supply chain, through multiple levels of suppliers.

All of this means that for the first time in history, a manufactur-ing firm can truly incorporate JIT manufacturing techniques, elimi-nating safety stock, excess carrying costs, and production ofunwanted goods. Bringing transparency and continuity to thatextended supply chain means that firms can edge much closer toachieving what Dell’s CFO Tom Meredith suggested nearly threeyears ago—that “when the customer clicks the mouse, our supplierswill feel the ping.”

14

This level of collaborative fulfillment—the seamless integrationof software and process that allows for complete visibility of the real-time order fulfillment process to all partners—is of course a distantideal for most manufacturing firms. And yet many progressive com-panies are even now moving closer to an “available to promise” elec-tronic process that will eventually mean they achieve the nirvana ofmanufacturing gurus—the “sell one/make one” supply chain.

DRAGGING THEIR FEET

If all of this is going to happen, however, it certainly hasn’t happenedyet. Although the few that have made the investment—companieslike Federal Express, Chevron, United Technologies, Microsoft, Brit-ish Telecom, and Texas Instruments—are reaping significantreturns, they tend to be the exception rather than the rule. Theseorganizations tend to be culturally progressive industry leaders withstrengths in high technology and leading-edge processes. Whencombined with enormous purchasing budgets, they have found thepotential returns on investment from e-procurement to be too com-pelling to ignore.

Despite the persuasive statistics and the significant returns bythe early industry leaders, most companies are at best only in the


12 E-PROCUREMENT

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early planning stages of their e-procurement strategies. Part of theproblem is simply that for most companies the procurement processis still seen as tactical rather than strategic—as a cost rather than abenefit—to the company. In fact, a recent survey by Deloitte indi-cated that despite the fact that some 90% of businesses interviewedclaimed that e-procurement is “part of their ongoing business plan,”very few companies have any broad strategy for e-procurement thatinvolves their supply chain, and incredibly, only 1% of respondentsto a 1999 survey by W.W. Grainger said they used an Internet-basedsoftware platform to purchase office materials. Similar bad newsfrom the suppliers’ side—PriceWaterhouseCoopers found that whilealmost every company interviewed recognized the importance ofbusiness-to-business transactions, more than 25% said that they hadno functionality beyond basic online “brochureware.”

15

Unfortunately, by all indications, an e-procurement strategy formost U.S. companies is still limited to occasional and uncoordinatedshopping online for office supplies. Few have associated e-procure-ment with the purchase of mission-critical, direct manufacturingmaterials, and despite investing heavily in ERP and advanced plan-ning and scheduling platforms, most manufacturing and distributioncompanies still admit that their processes for managing procurementare “ill defined or not defined at all.” In fact, despite years of focus onstrategic sourcing and VMI (Vendor-Managed Inventory), accordingto W.W. Grainger, only 14% of large companies in 1999 had an inte-grated supply chain relationship with their vendors.

16

As might beexpected, those relationships are skewed almost entirely toward theirlargest suppliers. The average Fortune 500 company may purchasefrom up to 10,000 suppliers, but are seldom connected electronicallyto more than a handful—25 to 50—of their largest tier-one vendors.Only one half of one percent of suppliers to the Fortune 500 compa-nies are currently connected to e-procurement—mostly EDI (Elec-tronic Data Interchange)—systems.

17

Europe, for the most part, is even less well-advanced in theirpreparations. They began more slowly, and Web-based buying fromsuppliers is still in its infancy. Forrester Research claimed that in1999, they struggled to find even 20 firms beyond an e-procurementpilot phase that could qualify as “sophisticated multinationals,”—those that had well-developed e-procurement strategies for bothindirect and direct goods. They classified a further 600 companies as“aware,” meaning that they had begun to make the necessary invest-


E-PROCUREMENT


13

ments but were still struggling to implement solutions and get areturn on investment.

18

A recent study by Net Profit in Europefound that although there was a very high level of interest in e-pro-curement among European companies—58% were considering anInternet-based purchasing system and 75% of respondents thoughtthat the Internet would be “very” or “extremely” important for pro-curement in three years’ time—only 14% of companies had actuallyinstalled systems.

19

When it comes to integrating e-procurement into direct supplychain materials, the U.K. fared poorly. In a survey that covered bothsmall and large-sized U.K. companies, The Chartered Institute of Pur-chasing and Supply found that only 23% had a comprehensive supplychain strategy, and only 17% reported viewing supply chain procure-ment as important enough to merit board-level representation. Only5% of current procurement spending is completed online.

20

There are many explanations given by company executives forthis hesitancy to take the plunge into e-procurement. One obviousreason is that despite today’s general atmosphere of “e-panic” in themedia, a huge number of U.S. small and mid-sized companies—around 35%—still have no access to online services. For others, par-ticularly for small and medium-sized manufacturing and distribu-tion companies, the entire concept of e-procurement via the Internetis a fairly recent phenomenon, and they simply have had little timeto come to grips with its implications.

More often, companies complain that although they have accessto the Internet, there remains such a complete separation between theInternet and any of their company’s legacy systems, that even whenthey select products from online catalogs, they are forced to workthrough the same old manual, paper-based requisition and purchaseorder process. A recent survey by W.W. Grainger revealed that morethan two-thirds of respondents said they used the Internet to get prod-uct information, even though they couldn’t actually order online.

21

Other companies explain that they are not slow in realizing thepotential benefits of e-procurement for both indirect and directmaterials, but are simply too busy and too unfamiliar with all theoptions to begin the potentially enormous effort required to select,buy, and integrate systems. This is particularly frustrating for pro-curement officers in manufacturing and distribution companieswho feel comfortable moving more rapidly into online procurementof indirect materials—maintenance and repair items, office supplies,


14 E-PROCUREMENT

chapter 1

travel services—but are held back by corporate leaders who cannotyet decide whether or not their indirect procurement strategy shouldbe part of, or separate from, their wider supply chain procurementand replenishment strategy. And many company leaders are still jus-tifiably concerned about the daunting prospect of integrating multi-ple systems—demand planning, ERP materials management,payment systems, and so on—particularly in the context of ever-changing major software platforms and e-procurement offerings.

Interestingly, probably the most often-cited reason for not mov-ing immediately into e-procurement has been concerns over securityand trust. For most companies, some of their most important assetsare their buying plans, their pricing models, and their new productdesigns. Many executives are concerned that once information goesoutside the company firewall, these key assets may be exposed tocompetitive eyes. In the PriceWaterhouseCoopers survey of seniorbusiness leaders in the U.K., Germany, France, and the Netherlands,these types of security issues were cited as the most important factorholding back e-procurement progress. This was particularly true inthe case of online procurement of mission-critical direct materials,where issues concerning third-party security and the delivery reli-ability of unknown vendors made procurement officers hesitant togive up their (admittedly cumbersome) paper-based process con-ducted with long-time, trusted suppliers.

22

For these and other reasons, most companies are still in the veryearly phases of developing and implementing their e-procurementstrategy, still trying to understand their many options, weighing upthe pros and cons of plunging into the fray, or holding back untilmore is known about this fast-changing and unpredictable area of e-business. Based on any number of recent studies, it is safe to assumethat the majority of organizations—buyers and sellers—will nothave a fully implemented and integrated e-procurement process inplace for at least the next three years.

This hesitancy, however, does not mean that the e-procurementrevolution is not going to happen. Software providers are quicklyrising to the challenge, and in many ways, it is software that drivesthis marketplace. According to Killen & Associates, the combinedsoftware, electronic catalog services, procurement payment systems,and implementation services jumped from a mere $300 million in1997 to nearly $725 million in 2000.

23


E-PROCUREMENT


15

Very real competitive forces are driving companies to extend andintegrate their supply chain and to reduce their purchasing costs—both for indirect and for direct inventories. These forces include theenormity of potential savings, the rapid move toward agreement onstandards, and the push and pull from powerful industry leaders.And, interestingly, from an economic point of view, the value to eachindividual participant increases as more suppliers and buyers partic-ipate in the e-procurement marketplace.

IS B2B 4 U?

Given this mixture of intense competitive pressures, a turbulentmarketplace, and widespread managerial hesitancy, what is the bestway to begin moving forward toward making a decision about yourcompany’s e-procurement strategy?

As always, one way is simply to look at the business case for e-pro-curement at an organizational level. It is worth noting that, for onething, the return on investment for e-procurement tends to be muchgreater than any of the business improvement revolutions—businessprocess reengineering, strategic sourcing, activity-based costing,ERP—that have preoccupied organizations for the past decade.

To understand why the return on investment for e-procurementcan be so significant, it is first important to understand the sheerdollar magnitude of procurement-related activities in the averagecompany. Doing this for indirect materials—office supplies, mainte-nance and repair parts and services, travel planning and booking,and so on—is much more straightforward, of course, than the infi-nitely more complex activities of the modern supply chain, whichwill be examined in more detail later.

There are at least two good ways to put your procurementspending in perspective. The first is simply to look at the percentageof total revenue that your company spends on non-production pur-chasing costs. Using this approach, the Center for Advanced Pur-chasing Studies estimates that the average company tends to spend40% of its revenue on non-production purchasing, depending, ofcourse, on the industry.

24

W.W. Grainger sets the figure slightlyhigher, averaging nearer 60% of total expenditures.

25

That meansthat for every dollar a firm earns, between 40 and 60 cents is spenton maintenance, repairs, office materials, and employee services.


16 E-PROCUREMENT

chapter 1

Although a huge amount of money, these figures simply reflectthe prices paid for goods and do not take into account the significanttransaction costs associated with those purchases in terms of labor,time, and delays.

In reality, price is neither the only nor the major com-ponent of cost to an organization when estimating procurement spend-ing.

In fact, a recent study by Group Trade concluded that althoughleveraging your buying power through online e-markets mightreduce the price paid by 10% to 20%, the real value to the com-pany—up to 70% of total savings—comes from savings realizedthrough reducing transaction costs.

26

This tends to be one of the most pressing problems with large-scale procurement, generally. The fact is, without accurate, real-timedecision support tools that can help a company to understand theunderlying costs of the process—transaction costs, vendor deliveryor quality issues—firms (and individual departments) far too oftenfocus exclusively on price, many times at the expense of broader“value creation” opportunities. It is usually true in any endeavor:you get what you pay for, and a focus on price alone often results inultimately higher costs because of unpredictability or poor supplierperformance. This is particularly true in maintenance and directmaterial purchasing situations where certainty of the right materials,delivered at the right time to the right place, can be far more valu-able than a lower price per high volume or per item. Too often, com-panies suffer through devastating delays, shutdowns, or recallsituations simply because they have bought in bulk or for price (asmany manufacturers have found to their frustration with recentpurchases from unknown sellers completed through onlineexchanges). Equally, from a supplier’s perspective, adding valuethrough quality services is much more profitable and predictablethan a price race to the bottom.

More important, of course, is what level of savings organizationsthemselves can expect to make by eliminating slow, inaccurate, andcostly paper-based processes. These savings are best measured interms of transaction costs, which include things such as lost dis-counts and “maverick” buying, hours spent in supplier relationshipmanagement, time and labor hours spent in the paper-based ordergeneration, requisitioning and approval process, quality assurance,returns, capital cost of warehouses’ excess inventory, carrying coststhat come as a result of disconnected replenishment channels, shop-floor downtime from items needed but missing, and so on. These are


E-PROCUREMENT


17

the types of savings that should be measured into the equation to getan accurate picture of the scale of improvements that can come fromfully automating this procurement process.

Looking at these transaction costs themselves provides a secondway of gauging relative procurement costs. Even today, the vastmajority of purchasing transactions of indirect materials is done invarying combinations of telephone (still used by 85% of companies),faxed orders (used by 65% of companies), or face-to-face discus-sions with suppliers (50% of companies). Using these slow andlabor-intensive (if personal) methods, the average transaction costtends to be somewhere between $80 and $110 for each order. TheAberdeen Group sets average indirect transaction costs at $107 perorder. British Telecom set its average pre-e-procurement transactioncost at $80.

27

Although prices can be driven down through better vendormanagement, adherence to discounts, and the reduction of maverickbuying, the big savings come through greatly reducing these transac-tion costs. To understand the scale of what automating your pro-curement process can do, consider data offered by those who haveinitiated strong e-procurement programs:

�

British Telecoms claim to have cut their average transactioncost from $80 to $8 dollars on a volume of $1.3 million intransactions.

28

�

The Aberdeen Group reports that e-procurement systemshave dropped the average transaction cost for the companiesthey surveyed from $107 to $30, with a corresponding drop inaverage cycle time from 7.3 days to 2 days.

29

�

IBM says that they cut the average cost of generating anorder from $35 to less than a dollar.

30

�

Raytheon Systems are predicting a reduction in the cost oftheir purchase orders from $100 per piece to less than $3.

31

�

Microsoft reduced direct purchasing costs from $60 to $5,and claims to have reduced its purchasing department from 29to 2 full-time purchasing employees.

32

�

Companies report reducing transaction costs by as much as75% over traditional phone or fax-based ordering.

33

�

The

Wall Street Journal

sets the average cost of a paper-basedpurchase order at $150 and an e-commerce PO at $25.

34


Cas

e St

udy

18 E-PROCUREMENT

chapter 1

These figures are especially impressive given that most e-pro-curement systems are still in their design infancy and involve onlyindirect goods. Companies have seldom integrated these systemswell into their direct production purchasing processes—an area ofenormous savings yet to come.

As astounding as the improvement in transaction costs appear,they are borne out by corresponding return on investment (ROI)figures. According to the Aberdeen Group, within the first full yearof deployment, companies have been able to realize more than a 300percent return on investment through Internet-based e-procure-ment systems.

35

A study completed by Deloitte Consulting last yearfound that of over 200 organizations currently involved with e-pro-curement projects—with average implementation costs of between$2 and $4 million— reported savings averaged 9% over the first twoyears.

36

A similar study by W.W. Grainger set an average ROI forbuying companies installing e-procurement systems of between 245and 400 percent. And although sellers showed much smaller returnsof between 10% and 15%, through moving online, they were able toincrease their sales by an average of 300%.

37

BANK OF IRELAND TAKES LEAD ON E-PROCUREMENT

The Bank of Ireland is a good example of the potential savings that can be made. The bank spends an average £330 million each year in purchasing ORM materials, and found that it had some 37 different standalone purchasing systems and procurement processes. Its supplier list had not been rationalized in years. Following implementation of a full e-procurement initiative—

which included programs for ven-dor rationalization, process improvement, and systems imple-mentation—it reported saving 30%—nearly £Ir1 million in one year.

Source: Billinge, Colin, “Everyone Needs a Leader,”

The Financial Times

“Under-standing E-Procurement” Survey, Win-ter 2000, p. 14.


E-PROCUREMENT


19

Few businessmen can be unmoved by figures like these, and yetmany believe that the most significant long-term savings will comenot from greater efficiency alone, but also from freeing up procure-ment employees from the drudgery of day-to-day transaction pro-cessing, and refocusing their talents on strategic sourcing activities.And, because of the nature of an all-inclusive e-procurement system,one of the most important benefits to be realized with automation ofthe procurement process is that, for the first time, an organizationwill be able to accurately track costs for labor, error reconciliation,lost orders, maverick buying, and delays in the process. One of themost telling revelations coming from the myriad of studies beingdone on this subject is that, incredibly, very few companies can pro-vide accurate figures for money lost through noncontract or maver-ick buying, or calculate with any reasonable level of accuracy thevolumes of spending per vendor on contracts that might allow themto negotiate improved terms or discounts. Large companies seldomcan identify their suppliers across the entire enterprise or breakdown with any precision the nature of their spending with key sup-pliers or by operating divisions.

In short, companies that have invested strongly in e-procure-ment have not only found a significant return on their investment,but have come a long way in being able to get an accurate grasp onwhere and why they spend.

Finally, whatever the exact numbers, it is worth keeping in mindthat savings from procurement costs can be applied directly to the bot-tom line, which in effect makes them more valuable than two to threetimes that amount in revenue growth alone

. In fact, according to somestudies, a 10% reduction in procurement costs can result in up to anearly 50% rise in profit margin.

38

However we measure the potential savings, though, it is quicklybecoming obvious that e-procurement is a viable and valuable newway of doing business, and although still in its early days, promisesto be something that will soon be adopted by companies large andsmall. In this book, then, we work under the premise that not onlycan e-procurement be a valuable new opportunity for most organi-zations in the coming years, but that with the relentless push by soft-ware companies, powerful market creators, and government, thewide adoption of e-procurement is virtually inevitable. Accordingly,we will explore in this book the various important aspects of thisnew economic and business phenomenon in order to understand


20 E-PROCUREMENT

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what it is and why it is important, and to help companies just begin-ning to anticipate the shift toward online purchasing to be able tomove more quickly toward an e-procurement initiative—from strat-egy through implementation.

ENDNOTES

1. “A Virtual Investment,”

The Financial Times,

December 5, 2000,p. 18.

2. “The New Economy Survey,”

The Economist,

September 23, 2000,pp. 10–11.

3. Nairn, Geoffrey, “Ripples From a Quiet Revolution Bring NetGains for Manufacturing Sector,”

The Financial Times IT Survey,

November 1, 2000, pt. I.4. Fisher, Andrew, “Many Markets Set for Macroeconomic Shock,”

The Financial Times IT Review, October 18, 2000, pt. V.5. Brookes, Martin, “The Shocking Economic Effect of B2B,” The

Goldman Sachs Group, Inc., pt. V.6. “The New Economy Survey,” The Economist, September 23, 2000,

p. 11.7. “Could B2B B4U?”, The Economist, May 27, 2000, p. 79.8. “The New Economy Survey,” The Economist, September 23, 2000,

p. 7.9. Nairn, Geoffrey, “Ripples From a Quiet Revolution Bring Net

Gains for Manufacturing Sector,” The Financial Times IT Survey,November 1, 2000, p. 1.

10. “E-Procurement: The Transformation of Corporate Purchasing,”Time, Inc. in association with AMR Research, Inc., May 2, 2000,©2001 Time Inc., all rights reserved. www.fortune.com/sections/eprocurement2000, retrieved July 19, 2000.

11. “The New Economy Survey,” The Economist, September 23, 2000,p. 11.

12. “E-Procurement: Unleashing Corporate Purchasing Power,” Time,Inc. in association with AMR Research, Inc., May 2, 2000, ©2001Time Inc., all rights reserved. www.fortune.com/sections/eprocurement2000, retrieved July 19, 2000.

13. Newing, Rod, “Internet Rain Puts a Bloom on the Business-to-Business Marketplace,” The Financial Times IT Survey, November 1,2000, p. I; Brown, Malcolm, “Bluffers’ Guide to B2B Marketplaces,”The Financial Times IT Survey, November 1, 2000, pt. III, V.

14. Nairn, Geoffrey, “Ripples From a Quiet Revolution Bring NetGains for Manufacturing Sector,” The Financial Times IT Survey,November 1, 2000, pt. I.

15. Trommer, Diane, “Myth vs. Reality,” ZDNet: Tech InfoBase, June12, 2000, p. 1.


E-PROCUREMENT The New World of Business-to-Business E-Commerce 21

16. Gartner Group, “A CEO’s Internet Business Strategy Checklist:The Leading Questions,” Business Technology Journal, April 1999;“Survey: How Companies Order MRO Supplies,” Modern Distri-bution Management, 30.04, February 25, 2000, p. 7.

17. “E-Procurement: Unleashing Corporate Purchasing Power,” Time,Inc. in association with AMR Research, Inc., May 2, 2000, ©2001Time Inc., all rights reserved. www.fortune.com/sections/eprocurement2000, retrieved July 19, 2000.

18. From The Forrester Group’s report “Net Buying Benefits,” as citedby Mark Vernon, “Livelier Image for a Low-Profile Task,” TheFinancial Times, March 24, 1999, p. 16; Batchelor, Charles, “Logis-tics Aspires to Worldly Wisdom,” The Financial Times, June 17,1999, p. 17.

19. Bowen, David, “The Magic of Online Trading,” in “UnderstandingE-Procurement,” The Financial Times, Winter 2000, p. 10.

20. Batchelor, Charles, “Logistics Aspires to Worldly Wisdom,” TheFinancial Times, June 17, 1999, p. 17; Ward, Hazel, “Bosses VoiceE-Procurement Fears,” Computer Weekly, July 20, 2000, p. 2.

21. “Survey: How Companies Order MRO Supplies,” Modern Distri-bution Management, 30.04, February 25, 2000, p. 3.

22. Ward, Hazel, “Bosses Voice E-Procurement Fears,” ComputerWeekly, July 20, 2000, p. 2.

23. “Boost Your Purchasing Power With Web Software,”www.datamation.earthweb.com/enap/01buy3.

24. Dyck, Timothy, “Big Payoffs for E-Commerce Adopters,” ZDNet:eWeek, November 16, 1998.

25. Brack, Ken, “E-Procurement: The Next Frontier,” Industrial Distri-bution, January 1, 2000, p. 3.

26. “Could B2B B4U?”, The Economist, May 27, 2000, p. 79.27. “Survey: How Companies Order MRO Supplies,” Modern Distri-

bution Management, 30.04, February 25, 2000, p. 1; Brack, Ken,“E-Procurement: The Next Frontier,” Industrial Distribution, Jan-uary 1, 2000, p. 3; “Business-to-business Sales Set to Soar,” Finan-cial Times Survey, October 20, 1999, p. 2.

28. “Business-to-business Sales Set to Soar,” Financial Times Survey,October 20, 1999, p. 2.

29. Brack, Ken, “E-Procurement: The Next Frontier,” Industrial Distri-bution, January 1, 2000, p. 3.

30. McDonald, Sheila, “Top Story: B2B Hits the Trenches,” Electric-News.net, April 28, 2000, p. 2.





22 E-PROCUREMENT chapter 1


35. “E-Procurement: Transformation of Corporate Purchasing,”Time, Inc. in association with AMR Research, Inc., May 2, 2000,©2001 Time Inc., all rights reserved. www.fortune.com/fortune/sections/eprocurement2000, retrieved July 19, 2000.

36. “Leveraging the E-Business Marketplace,” Deloitte Consulting,Fall 1999, www.dc.com/services/product.asp.

37. “Study Shows Big Rewards for B2B E-Commerce Procurement,” E-Commerce Times, part of News Factor Network (www.NewsFactor.com), October 1, 1999, p. 1.

38. Fisher, Andrew, “It’s a Small World After All,” in “UnderstandingE-Procurement,” The Financial Times, Winter 2000, p. 6.



CHAPTER

Objective

CHAPTER

24

2

The Fundamentals of Procurement

One reason for the confusion surrounding e-procurement

is that the press often lumps all procurement into a single

group, as if all purchasing techniques and commodity

groups required the same systems and approach. This is

not so, and several key distinctions should be made when

considering your company’s e-procurement strategy.

�

Procurement materials can be broken down into two major categories: indirect and direct.

�

Indirect procurement involves any commodity or service that does not result directly in finished goods.

�

Indirect procurement can be divided into two groups: ORM (e.g., office products and travel services) and MRO (e.g., replacement parts) materials.

�

Direct procurement involves materials purchased for use in manufacturing or distribution that are “directly” related to the production of finished goods.

�

With e-procurement, the traditional division between direct and indirect purchasing paths is beginning to blur.


25

raditionally, procure-ment has been broken

down into two major cate-gories: indirect and direct.In general terms, indirectprocurement describes all ofthe day-to-day necessities ofthe workplace—staplers,paper, furniture, laptopcomputers, pencils, travelservices—those things thattend to be of low value peritem, but are usually bought in high volumes. In the typicalcompany, indirect procurement accounts for 60% to 80% ofall purchasing transactions.

Direct materials, obvi-ously then, are thoseinvolved in the manufac-turing supply chain thatare

directly

related to theproduction of finishedgoods. These materialstend to be purchased inlarge volumes, anddepending on the level ofsophistication of a com-pany’s forecasting and

planning capacity, are, at least to purchasing specialists,fairly predictable in name, if not in exact amounts. Purchas-ing officers in aluminum manufacturing companies knowthey need to procure certain quantities of bauxite and alu-minum at certain times during the manufacturing process.High-technology manufacturers know that they will requiremicrochips, wiring, and other components. Procurement ofdirect goods, then, is of concern only to manufacturing, dis-

T All companies—whether manufacturing, distribution, retail, financial, or professional services—purchase large amounts of non-production, indirect goods, usually spending an eye-opening average of 40% to 60% of the total revenue of the company.

Direct Materials: those materials involved in the manufacturing supply chain that are “directly” related to the production of finished goods.

Indirect Materials: any commodity or service that a company buys that does not result directly in finished goods.


26 E-PROCUREMENT

chapter 2

tribution, or retail companies—those that create, assemble, or movelarge numbers or amounts of finished or perishable goods. Becauseof their predictability and high volume, procurement of direct mate-rials accounts for far fewer purchasing transactions (between 20%and 40% in manufacturing companies), but can account for up to60% of a manufacturing firm’s total procurement expenditure.

1

INDIRECT PROCUREMENT: ORM VERSUS MRO

The term ORM (OperatingResource Management) is nowused commonly to describe themany ordinary office products andservices that organizations pur-chase day to day: office supplies,

furniture, forms, travel services, computers, janitorial and mainte-nance services, light bulbs, extension cords, and the like. Usuallythought of as high-volume and low-dollar items, they nonethelessamount to a significant portion of a company’s total spending. Togive some idea of the scale, in the U.S. alone in 2000, the overall mar-ket for ORM products and services reached $725 million.

Over the years, the abbreviation MRO—for Maintenance,Repair and Operations—has come into popular use, and today mostsoftware vendors selling solutions for indirect materials (and, there-fore, the popular business press) have begun to mistakenly lump allindirect goods together under this heading. But there is an impor-tant distinction that should be made. Office products should not beconfused with mission critical overhaul or maintenance items. Inpurchasing, the two groups of goods are often known as

white collarORM

(staples and notepads) and

blue collar MRO

(replacementparts), and the respective purchasing processes in terms of the levelsof complexity, cost, and volume, vary enormously. Many analystsbelieve that MRO is in fact the much more important of the two.

“In spite of the current hypeabout the ability to buy officeproducts or janitorial supplies overthe Web,” contends Lisa Williamsof the Yankee Group, “the real ‘gat-ing’ factor to growing this B2B e-commerce market will be the use ofthe Internet to manage and procure mission-critical items such as

ORM (Operating Resource Management): ordinary office products and services that organizations purchase day to day.

MRO (Maintenance, Repair and Operations): mission critical overhaul or maintenance items.


E-PROCUREMENT


27

component parts, expensive plant spares, and outsourced manufac-tured items.”

2

Certainly, procurement of white collar indirect supplies tends tobe less complex than procurement of blue collar, or industrial, MRO,for obvious reasons. Indirect goods are seldom time or mission-crit-ical, and as important as pencils or notepads are, items like these canbe purchased from any number of wholesale—or retail—vendors,each selling similar, if not identical, brands. These items can easily bedescribed and cataloged—black ball-point pens or bond white liq-uid paper—and therefore do not require the specialist expertise nec-essary when purchasing complex electrical repair components orhighly engineered machine parts necessary for maintenance of com-plex manufacturing equipment. After all, it is much easier to quicklylook up in a catalog—or run down to the local retail outlet—to pur-chase paper clips than it is to search for and procure a specially tem-pered, metal valve stem.

The consequences of misordering are also obviously different(see Table 2.1). Getting the wrong color ball point pen is bad, butbuying the wrong shear pin or gasket for a critical assembly-linecomponent can be catastrophic. Also blue collar MRO orders areoften single-sourced, purchased in limited quantities, and are neces-sary to prevent the shutdown of the production lines. Blue collarMRO orders can easily amount to several hundreds of thousands ofdollars, and require special service contracts. Blue collar items areoften listed as inventory, tied into the company’s inventory system,and accompanied with critical and complex design and performanceregulations. Purchasing and maintenance employees often need todo a good deal of time-consuming prescreening of suppliers in orderto understand which vendors will be trustworthy. MRO buyers areusually looking for high levels of quality control and technical sup-port from their suppliers, so that replacement parts are deliveredquickly, often at a few hours’ notice. As a result, the average companyuses up to 50 different MRO suppliers, and over a third of U.S. com-panies use 50 or more.

3

There are two key cost areas in indirect procurement. The first issimply the straightforward inefficiency and labor-intensity of theprocess itself. For most companies, the centralized purchasing func-tion has traditionally been responsible for buying a good portion ofall indirect, non-production goods—whether blue or white collar—


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with around half of the workload of a typical purchasing departmentdedicated to these low-value, repetitive orders. The average level ofproductivity for this area is appalling, and it is one of the most labor-intensive areas of modern business.

Part of the problem is that indirect procurement policies are sel-dom standardized in large or multisite companies, varying greatlybetween departments and between branch and corporate office. Theaccompanying approval policies are usually cumbersome, some-times requiring multiple levels of sign-off, which causes delays andinternal inconvenience when employees wait for needed items and

A COMPARISON OF WHITE COLLAR ORM AND BLUE COLLAR MRO

Issues“White Collar” ORM “Blue Collar” MRO

TABLE 2.1

Number of Orders

Moderate Often hundreds of thousands

Quantity per Order

Few to moderate Varies from one to thousands

Delivery Criticality

Generally low Routine to critical to the point of work stoppage for delivery failures

Ratio of Single Source

Low High percentage (up to 30% by count, more by value); may be singe/very limited sourced

Services/Contracts

Some Almost always required—performance is critical in many cases

Accounting Tie Back

Generally only to a GL account

May be multiple—to work order, equipment, GL and other accounts, capital tie back as well

Controlled Inventory

Rarely Always

Internal Item Master

None Frequently—usually critical functionality

Vendor Performance Measurement

Minimal—usually by contract

Almost always—variable measurement criteria

Source: Gartner, “The MRD E-Procurement Civil War: Blue vs White,” Dan Miklovic & Carl Lenz, February 2000.


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middle-management staff members put off signing burdensomepaperwork. In exasperation, approval thresholds are raised, andspending anarchy ensues, with only the larger ticket items fallinginto an even more stringent and extended approval process.

There is a second area of cost. For most companies, this cumber-some, centralized process is augmented by independent, or

maverick,

buying by employees throughout the organization who buy items—paper, scissors, light bulbs—when needed independently, often atnondiscounted and even retail prices. This maverick buying—thattendency for individuals, or often entire departments, to buy “off-contract” without taking advantage of negotiated company dis-counts—is often rampant, particularly among larger companies, andtypically can account for a staggering average of between 30% and45% of all indirect procurement spending.

To put the effect of thismaverick buying phenomenon into perspective, consider that at theserates a typical billion-dollar company would be losing up to $10 millioneach year just in lost discounts alone.

The smaller the company, the lessformal the process, as a rule, and for those non-manufacturing com-panies that do not see purchasing as a core competency, a frightening84% of indirect materials are purchased simply by employees visitingtheir local retail outlet.

4

This “rogue buying” can be a significant costto companies, and even a modest reduction in maverick purchasingcan significantly cut procurement costs.

A DAY IN THE LIFE OF A TYPICAL PROCUREMENT SCENARIO: TODAY

In order to appreciate both the need for e-procurement and why it isso revolutionary, it is only necessary to look at a typical organiza-tion’s approach to procurement.

Select Goods

Today most companies still have shelves filled with well-thumbed(and often out-of-date) paper catalogs provided to them by thevendor. These are available only to those with direct access (i.e.,usually central purchasing) and often require multiple calls andsemi-confused conversations between users and the purchasingspecialist, and then many other calls to the several suppliers inorder to resolve issues on price, availability, and delivery times.


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The Requisition Process

Except for those companies whose central purchasing department hasdirect links to a supplier through EDI, the requisition process is stillpaper-based, usually with multiple copies of requisition forms sentthrough internal mail to various managers within the approval chain.Approving managers seldom know if the vendor is “on-contract,” orhow the purchase will be affected by volume discounts.

Waiting for Approval

In many companies, the approval process then follows two paths:technical and financial, with expensive or unusual items moving upa chain of multiple sign-offs, often with long delays and manyexplanatory phone calls. I recently worked with a financial servicescompany that was examining its procurement process and that hadseven layers of sign-offs for approval of items over $500 for both thetechnical and the financial sides. The average time for approval forhigh-cost items was three weeks, but could easily run into months.

Creating the Purchase Order

Once final approval has been given, central purchasing collects thepaperwork and the information is transferred—by hand—to a pur-chase order form and then usually faxed to suppliers. This is gener-ally accompanied by further phone calls to confirm receipt. Copiesare sent to shipping and receiving and accounting and finance, andthen filed with various department managers.

For most companies, this process remains much the same as itwas before World War II (except for the fax, of course); with longand unpredictable cycle times. Although there is usually a strongrelationship between purchasing officers and suppliers, particularlyfor indirect goods, there is little ongoing attempt at strategic sourc-ing. Often, policies vary or overlap between each office, division, andbusiness unit, or between corporate and departmental levels. Thereis seldom any means for tracking the progress of the order, nor anyformal or standardized system in place to measure relative costs, sav-ings, or vendor performance. Long lead times, particularly withMRO items, cause individuals to stock excess materials, raisinginventory levels and carrying costs, and increasing the risk of obso-lete stock.

Although in most manufacturing and distribution companiesprocurement is often a core competency, the process of purchasingdirect materials for many companies is frustratingly similar to that


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of indirect goods. But purchasing direct production materials orMRO is, first and foremost, time sensitive and focused on the hourlydemands of the assembly line. Yet, because the process is still paper-based and therefore both sequential and prone to errors, even themost efficient purchasing employees tend to experience a lack ofintegration between departments, numerous misorders, and gaps inmaterials delivery. The fear of being caught short forces purchasingofficers to carry excess inventory, thereby raising carrying costs.Attempts by the CFO to reduce inefficiency through cost-basedaccounting and departmental-based incentive programs often createconflicting, silo-based priorities, disrupting the horizontal supplychain process flow, forcing managers back into positions where theirdepartment budget becomes more important than overall efficiencyor cost of production to the firm.

The same issues concerning strategic sourcing and volume dis-counts apply to the direct materials side, where purchasing staffoften complain of a lack of accurate, up-to-date performance dataon what can be hundreds and sometimes thousands of suppliers. Allof these issues are simply compounded by the complexity and scaleof the procurement process for manufacturing. And yet all excesscosts stem, ultimately, from the fact that a paper-based, sequentialprocess, no matter how well-devised and run, can simply not pro-vide a company with a single, accurate forecast, a just-in-time (JIT)materials delivery process, rationalized and minimized safety-stock,and a reliable available-to-promise date.

It is this unpredictability—that the wrong goods are being ordered, that the vendor will not deliverthe right items, that the goods will not arrive on time—that is the basisfor all excess costs.

NEITHER DIRECT NOR INDIRECT—JUST E-PROCUREMENT

Until now, the focus of nearly all e-procurement energy, software,and press coverage has been on the indirect materials side of pro-curement, partly because the purchasing process of high volume,low-unit-cost goods that can easily be bought at a retail store with acredit card are much easier to automate than more complexly engi-neered MRO or direct manufacturing materials and goods. The in-house software platforms and third-party exchanges and buyinghubs that are just now beginning to mature began their focus with


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indirect procurement, but are quickly shifting toward vertical andhorizontal exchanges for suppliers of direct goods. With EnterpriseResource Planning (ERP), Advanced Planning and Scheduling(APS), and independent supply chain software vendors movingquickly into alliances that will help extend a buyer’s supply chainback into their supplier’s systems, by all accounts, e-procurementwill be a major leap toward achieving the—until now, primarily the-oretical—“pull” type of relationship that manufacturers would liketo have with their suppliers, with vendors able to electronically andautomatically “see” through the entire supply chain and take respon-sibility for inventory and JIT delivery of production materials.

Accordingly, as valuable as the automation of the indirect mate-rials process can be, the real savings for manufacturing, distribution,and retail companies will come in applying those same principles todirect material procurement.

Even now, the traditional divisionbetween direct and indirect purchasing is beginning to blur, and thelogic of the evolution is toward treating it as one process.

One strong step in this direction comes when software vendorsbegin to develop

total procurement

information systems that capture,through advanced data warehousing tools that interrogate ERP andother back-end company systems, all information regarding suppli-ers and products purchased by the company. Decision support toolssuch as SAS Solution’s Supplier Relationship Management Systemhave emerged that allow companies to access and organize all trans-actional purchasing information—both direct and indirect—andconsolidate them in a single data warehouse. Using business infor-mation made available through an arrangement with Dunn & Brad-street, the system provides relationship information aboutsuppliers—what products were purchased from them, how muchthose products cost, the name of the supplier’s parent company,their delivery and financial performance—all of which providesorganizations with the ability to accurately complete strategic sourc-ing exercises based on real-time, legacy system information.

E-PROCUREMENT VISION OF THE FUTURE: TOMORROW

With e-procurement, life is very different. Any employee can be pro-vided on his or her desktop PC with access to a user-friendly point-and-click system on which he or she can browse through online cat-alogs of the company’s approved vendors. Products can be identified


E-PROCUREMENT


33

by features or by model numbers or names, and the search will pri-oritize the results according to how well items match the buyer’srequirements. The system will provide a side-by-side comparison ofthe products. Prices can be compared between suppliers, and dis-counts calculated easily. Information concerning availability, deliv-ery, and payment of supplies is readily available, and payments canbe made electronically.

Approvals for standard supplies are automatic, and exceptionsare immediately routed through a list of approval deputies, ensuringthat if no response is received in a matter of minutes, the approval isrouted quickly to another prenamed deputy. There is a completeaudit trail of the request, price, approval, and payment information,and transaction information is captured and recorded for vendorperformance analysis. There is an instant update for other interestedparties—accounts payable and receiving—and most transactionswill take only a few minutes. All purchase order and delivery detailsare available online for both the supplier and the buyer to see.

This level of functionality, particularly for indirect goods, isalready available, although the choice for the infrastructure—main-tained as in-house software or outsourced through third-party pro-viders or through online auctions—is still very fluid, and thesestrategic choices are explored in the following chapters.

The equivalent level of functionality and ease-of-use on thedirect materials side of procurement is less universally available now,but that functionality promises to explode in the near-term. Thesame functionality in terms of electronic requisitioning, online pric-ing, and streamlined approval exist, of course; but although thepotential for purchasing through the growing number of online auc-tions, reverse auctions, and industry exchanges exists, only the moststouthearted and progressive multinationals have plunged fully intoelectronic procurement of direct manufacturing materials.

But, whether direct procurement takes place through a third-party or through industry-focused supply portals (which areexplored in the following chapters), advanced companies are alreadyable to tap the Internet to source parts globally, manage inventorycollaboratively, forecast and plan production and manufacturingstarts with key suppliers, and provide transparency between ERPsystems so that suppliers can “see” and participate in the planningand execution of manufacturing forecasts. All of this can be done inreal time, greatly reducing the need to carry excess safety stock or tomaintain complex contractual relationships with preferred vendors.


Expert Viewpoint

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3M Takes on Indirect Procurement Over the Internet

3M, the diversified manufactur-ing company headquartered in St. Paul, Minnesota, in the past created hundreds of thousands of invoices each year for indi-rect supplies at a cost of approximately $120 each. The invoices accounted for more than 70% of the company’s transaction volume, but only 2% of total purchasing dollars.

Each requisition took from one to three days to process internally, and 30% of the orders required rework. Between 30 and 45% of the indirect purchases were not in compliance with vendor con-tracts, adding 20% to the annual costs of goods purchased.

Two years ago, 3M imple-mented a pilot TPN Market-place solution (from TPN Register), followed by a staged rollout of the technology through the end of 1999. Now

more than 2,000 3M buyers purchase contracted goods from a group of online suppli-ers. “By leveraging TPN Regis-ter’s Internet marketplace services,” says Kathy Van Keulen, project lead for 3M procurement, “we are gaining control over our indirect spend-ing, increasing on-contract pur-chases, dramatically lowering transaction costs, and virtually eliminating order-processing errors.”

With the internal use of TPN Marketplace increasing, Van Keulen says that 3M antici-pates reducing the cost of pro-cessing purchase orders 70 percent to an average of just $40 and shaving the internal order cycle time to less than one hour. Because the product and contract information is automatically generated on purchase orders, the error rate is expected to shrink to zero.

From “E-Procurement: Unleashing Cor-porate Purchasing Power,” ©2001 TimeInc., all rights reserved. www.fortune.com/sections/eprocurement2000.


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In its most perfect state, the simultaneous availability of data toall the parties in the extended supply chain means that—with theelimination of uncertainty, people, and paper—transaction time willbe reduced to very little more than the actual time it takes to physi-cally transport the materials. If tight integration can be achievedbetween well-integrated systems, the need for the now disparatethird-party software systems found today in many manufacturingcompanies—to monitor safety stocks or manage material flow—simply disappears. At best, this can dramatically increase service lev-els, smooth out the supply chain, and reduce costs.

But for many industry watchers, the benefits and effects go wellbeyond cost savings. E-procurement becomes the catalyst that willallow companies to finally integrate their supply chains from end toend, from sales to supplier, with shared pricing, availability, and per-formance data that will allow buyers and suppliers to work to opti-mum and mutually beneficial prices and schedules.

In short, formany people, it is the key to collaborative commerce and success inthe extended enterprise—the “Holy Grail” of production specialistseverywhere. Fortunately, the question is not whether or not this levelof functionality can be achieved; it is more a question for individualcompanies of how to achieve it, and at what price.

ENDNOTES

1. “E-Procurement: Unleashing Corporate Purchasing Power,”©2001 Time Inc., all rights reserved. www.fortune/sections/eprocurement2000, retrieved July 19, 2000.


3. Miklovic, D., and Carl Lenz, “The MRO E-Procurement Civil War:Blue vs White,”

Gartner Advisory Research Note, Tactical Guide-lines,

The Gartner Group, February, 2000, pp. 2–3; “Survey: HowCompanies Order MRO Supplies,”

Modern Distribution Manage-ment,

February 25, 2000, p. 6.4. “Survey: How Companies Order MRO Supplies,”

Modern Distri-bution Management,

February 25, 2000, pp. 1–2.


CHAPTER

Objective

CHAPTER

36

3

Understanding the Strategic Nature of E-Procurement

Too often in the past purchasing has been seen as a tactical,

back office activity. But, from now on, it should be viewed

as a critical part of a company’s overall e-business strategy.

�

ERP and APS systems have improved internal company processes.

�

E-procurement systems improve the external B2B processes. E-procurement is a matter of strategy first and technology second.

�

The idea of automating and integrating the procurement process should have a compelling value proposition for many different corporate officers.

�

E-procurement will not only reduce purchasing costs but will help to move manufacturing and distribution firms closer to becoming an extended enterprise, where the supply chain becomes a continuous, uninterrupted process extending from buyer through selling partners.


37

ost of us wouldadmit that the pro-

curement function has sel-dom in the past been seenas particularly strategic toan organization’s success.This is particularly true ofindirect goods and ser-vices, where, in squeezetimes, executives often press for cost-cutting measures, lim-ited usually to fairly ineffectual changes—restricting firstclass flights or suggestions that the coffee machines be fur-nished with less expensive brands. Savings have usually beenmade through discount negotiations or bulk buying; buteven these efforts are often offset by lack of choice andexcess carrying costs. It is because we have been so limited inour possible actions in the past—discounting or pricereductions—that we have come to view efforts to reduceindirect procurement costs as piecemeal and ultimately oflittle return for the effort.

Acquiring direct mate-rials for manufacturing, ofcourse, is a different story.Companies have longsought ways to reducecosts associated with thepurchase of materials,with the maintenance and

upkeep of machinery, and with the transportation anddelivery of finished goods. Purchasing of goods and serviceshas always been seen as an integral part of the supply chain,and attempts at using technology in order to eliminate bot-tlenecks in the past has led to the widespread use of faxmachines and, at least with larger buyers, the introductionof EDI (Electronic Data Interchange) technologies.

M Purchasing the goods necessary for the everyday running of a company is usually extraordinarily expensive and laborious, representing between 40% and 60% of total company revenue.

EDI (Electronic Data Interchange): a dedicated electronic connection, usually between buyers and their largest selling partners, used for transfer of purchasing information.


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In a broader sense, though, during the past two decades, partic-ularly, there has been a consistent and effective focus on productivityimprovement—ISO ratings, kanban, cellular manufacturing, strate-gic sourcing, vendor-managed inventory, JIT manufacturing—allwith the view that excessive costs (aside from price and unavoidabletransaction costs) stem from missed commitments, poor planning,inconsistent quality of merchandise, and general unpredictability inthe relationships between buyer and seller. And, although the poten-tial effects of e-procurement are significant, it is important toremember that driving inefficiency out of the supply chain is part ofan ongoing technical and structural revolution, and that as unstop-pable as it is, it is not all that revolutionary. In fact, it is probablyworthwhile to point out that this “evolutionary” shift has been tak-ing place for the past several decades, and is manifested in severalimportant ways.

First, e-procurement systems continue the trend toward auto-mation of the process and the replacement of human labor throughinformation technology (IT). E-procurement systems automate therequisitioning, approval, shipping, receiving process, and paymentsystems, and provides for automated routing and tracking capabili-ties, essentially eliminating the need for human intervention otherthan on an exceptions-only basis.

Second, e-procurement continues to enhance the breakdown oftraditional vertical silos and to shift management’s focus towardhorizontal processes and the empowerment of individual employees.In the past, the purchasing process was seen as a set of separate activ-ities and functions, controlled centrally or departmentally, oftenfocused narrowly on silo-based incentives rather than on total cost.As part of the tortured but inevitable shift from silo to horizontalprocesses, e-procurement systems facilitate the viewpoint that directprocurement of materials for finished goods is all part of a single,fully-integrated process, extending from forecasting and planningthrough to the entire supplier network. For indirect and MRO mate-rials, e-procurement systems allow for a far greater level of individ-ual empowerment as preapproved and fully auditable purchasing ishanded over to individual employees.

Finally, e-procurement means a giant leap forward in the long-sought-after development of the extended enterprise, where the sup-ply chain becomes a continuous, uninterrupted process extendingfrom buyer through selling partners. As an integrated set of pro-


E-PROCUREMENT


39

cesses and systems that create a seamless, electronically initiated andmonitored exchange of information, goods, services, and paymentbetween buying and selling organizations of all types, e-procure-ment is integral to a process that can, and should, stretch from theplanning and forecasting function of the buying company all the waythrough to the delivery and payment functions of the selling organi-zation, regardless of the product or service, and whether direct orindirect.

Many progressive companies have always seen procurement aspart of this chain of events, of course, but despite that, have seldomorganized their business horizontally as a single, multifaceted pro-cess—mostly because each step had to be completed individually byskilled humans. Unfortunately, despite our talk of horizontal pro-cesses and integrated supply chains, the fact is that e-procurement isstill in its infancy, and its effectiveness, particularly for direct materi-als, is dependent upon integration with other systems. It is also,most importantly, dependent upon not only sharing critical inven-tory information with suppliers (something few companies do welltoday) but also on actually integrating the supplier-buyer interface.That is why individual, nonintegrated procurement packages thatonly provide a focused or partial solution, are so problematic. It isalso why integration with a company’s back-end Enterprise ResourcePlanning (ERP) and Advanced Planning and Scheduling (APS) sys-tems becomes so critical.

BACK-END SYSTEMS AND THE MODERN ORGANIZATION

Despite the fact that the IT revolution has been with us now fornearly three decades, the more fundamental restructuring that waspromised (and feared) in terms of the replacement of people withsystems, has been far less dramatic than expected. This is because,until recently, the effect and focus of IT systems tended to be limitedto office automation and accounting. It was only with the introduc-tion of the massive and sophisticated ERP systems that organizationsbegan to use IT systems to fundamentally restructure the way theydid work. ERP systems became the backbone and nervous system ofthe modern organization, responsible for capturing, organizing, andpresenting the vast amount of financial, process, and performanceinformation. Although often poorly implemented and less agile thanhoped, they had the potential, at least, to fundamentally change the


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way that large numbers of employees worked in an organization.What is more, without a comprehensive system for collecting keycorporate information, all other systems were limited in their scaleto piecemeal and departmental functions. For the first time, ERPsystems allowed an organization to at least begin to understand, inreal time, what was occurring in their many processes—marking thebeginning of an entire new era of IT.

Unfortunately, in their initialphase, ERP systems did not neces-sarily produce the return oninvestment (ROI) or processimprovement results that mighthave been hoped for. Because theywere fundamentally designed to

collect, organize, and report on financial and manufacturing perfor-mance information, they could not help organizations with the nextkey step—using what they learned from that information toimprove their company’s performance. For manufacturing and dis-tribution companies, responsibility for forecasting and planning fellto the set of equally sophisticated software platforms that wereknown as APS systems. Their strength was taking the vast amount ofhistorical and real-time data available and “advising” the companyon the most sensible use of resources: demand forecasting and plan-ning, resource scheduling, and production plans. Enormously pow-erful, these APS systems often overlapped and competed with ERPsystems, causing significant and ongoing restructuring throughmergers, partnerships, and competitive development between thetwo groups. But ultimately, they filled a key gap in the evolution ofautomated systems—the second leg of a three-legged stool.

Yet, although the ERP and APS systems could provide compa-nies with all the information they required to function at an entirelynew level of productivity, organizations still lacked the ability to usethat information to seamlessly extend their supply chain throughpurchasing of materials and needed resources through their suppliernetwork. At best, these two systems could coordinate key areas suchas manufacturing, planning, and sales, but they did little to extendthe supply chain from customer to vendor. After all, it underminesthe value of ERP and maintenance management software if, afteralerting procurement specialists to the need to reorder critical main-tenance parts, the paper-based procurement process itself is toounpredictable to ensure timely delivery.

In short, ERP and APS have

APS (Advanced Planning and Scheduling): advanced software platforms that provide demand forecasting and planning, resource scheduling, and production plans.


E-PROCUREMENT


41

greatly improved internal company processes, but have done little toimprove external business processes. That is where the Internet, B2B e-commerce, and especially e-procurement systems come in

. They are thethird leg of the three-legged stool.

Notice in all of this that despite the hyperbole and market enthu-siasm, e-commerce (electronic retailing) as a fundamental step for-ward in the evolution of the extended enterprise does not figure asprominently as the current market noise level might lead us to expect.It is not that Web pages and portals are not important to establishedbricks and mortar companies, to the myriad of online dotcoms, andto the economy as a whole, but I suspect that ten years from now wewill see e-commerce for what it was—an extension of the advertisingand sales channel into individual homes. The real and lasting effect ofbeing able to order, sell, and pay over the Web will come from busi-ness-to-business and e-procurement transactions.

It is probably important to point out, however, that on the otherhand, e-procurement is not just purchasing done electronically. (Iuse the terms fairly interchangeably, although some would arguethat purchasing is essentially the “buying process,” whereas procure-ment is much broader in scope, covering much of the full order ful-fillment supply chain.) The changes that e-procurement demandsare fundamental in nature and unique to an age where key procure-ment information—in the form of item masters, purchase orders,product catalogs, inventory lists, and even payments—can be digi-tized and distributed simultaneously and instantly to multiple par-ties electronically, regardless of location. This will mean a significantlevel of restructuring, and rethinking of the way that companiesapproach purchasing of both direct and indirect goods. These revi-sions, in turn, will inevitably lead to significant productivityincreases for the global economy as a whole.

THE STRATEGIC NATURE OF E-PROCUREMENT

Over the past several years, I have facilitated many executive work-shops concerned with the procurement process. In more recenttimes, when examining e-procurement as part of a company’s over-all approach to e-business, I am still surprised to find that whenselecting potential attendees for these strategy workshops, the initialreaction by managers and executives alike is to nominate only direc-


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tors and managers who are directly engaged in day-to-day procure-ment activity to attend.

The reason is, of course, that many people still view the procure-ment process as a cumbersome, manual support operation (which,for most companies, it still is)—in any case, not an area to concerntop management. Many people once had a similar view of the supplychain, although attitudes have recently changed. After all, for manu-facturing and distribution companies, their very existence is depen-dent on getting the right product, where they want it, at the righttime, and at the lowest cost to their company. Business strategy isdefining the best way to do that, and procurement plays an increas-ingly pivotal role in that strategy.

In fact, the idea of automating and integrating the procurementprocess has a compelling value proposition for many different cor-porate officers. For the Chief Operating Officer, it means that he orshe can get lower cost materials, improve manufacturing through-put, and reduce carrying costs for safety goods. The Chief Procure-ment Officer is able to better focus on central purchasing, movingthem away from the administrative, cost center mentality, andtoward becoming a specialist purchasing group, responsible forcomplex or sensitive vendor negotiations, building supplier relation-ships, and strategic sourcing.

For the Chief Financial Officer, an e-procurement approach cansignificantly reduce both price of goods and real transaction costs,while greatly improving the company’s overall level of productivityby eliminating the manual, paper-based process. The Chief Informa-tion Officer can boast that he or she has brought value to users on thedesktop and steered his or her company toward the ranks of the pro-gressive. Finally, it reflects best on the Chief Executive Officer, whoappreciates that, in many ways, competition in the future, particu-larly among manufacturing and distribution companies, hinges onhow well the respective companies have organized and implementedtheir entire e-procurement process (that is to say, supply chain).

In the end, of course, e-procurement is a matter of strategy firstand technology second. As we have already seen, e-procurementaffects virtually every function in the enterprise, from central pur-chasing to a company’s myriad supplier base. Accordingly, compa-nies need to think about how they want e-procurement to affecttheir relationships with their suppliers. They need to rethink howthey want to organize their entire supply chain—from customer to


E-PROCUREMENT


43

supplier—and having understood the complex nuances of the cur-rent e-procurement marketplace, decide what types of services theywant to purchase, outsource, or keep in-house. Only then will theywant to begin thinking about hardware or software platforms.

But, more importantly, once implemented effectively for directmaterials purchasing, the process will extend directly from customerto supplier instantaneously upon an order, and will for the first timetruly provide for a “make-to-order” capacity. This is a huge step for-ward from simple JIT delivery of materials. The discipline of e-pro-curement, when seen as the supply chain’s key component, meansthat enormous strides have been made in removing “latency andinertia” in the supply chain itself. It is only when suppliers can “see”into the buyer’s supply chain systems, reacting real-time to orders,customized requests, or order changes, that the buyer can confi-dently promise his or her own customers that they can have custom-ized and rapid service. It means companies can greatly increaseservice without increasing costs to the customer, and this willbecome even more critical as companies move more and moretoward mass customization.

In short, the e-procurement initiative provides an invaluableopportunity for organizations to restructure themselves and theirpartner relationships in ways that are fundamental and were neverbefore possible.

STRATEGIC FOCUS OF THE E-PROCUREMENT INITIATIVE

Accordingly, the purpose of any e-procurement initiative should be to

�

Improve efficiency and reduce labor costs by eliminating themanual, paper-based processes and providing enterprise-wide,self-service procurement

�

Enforce on-contract buying; eliminate maverick buying

�

Gather accurate and meaningful data on total spending,both by supplier and type of purchase (decision support)

�

Using supplier performance, select preferred suppliers forstrategic sourcing

�

Move as many transactions as possible to front-line employ-ees without undermining business rules

�

“Smooth out” the supply chain: integrate process and sys-tems, internally and with suppliers


44 E-PROCUREMENT

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Ultimately, possibly one of the most important results of the e-procurement debate will be to highlight to key executives theimportance and strategic nature or the procurement process itselfand its integral relationship with the supply chain and a company’sbottom line.



CHAPTER

Objective

CHAPTER

46

4

Making the Business Case for E-Procurement

As with any major investment of time and resources, an e-

procurement initiative should be based upon a strong and

well-documented business case.

�

The e-procurement business case comes from three areas:

process efficiencies, compliance,

and

leverage

.

�

Process efficiencies come not only from eliminating paperwork and human intervention, but also from shifting indirect purchasing responsibilities, to the employee desktop.

�

The system reduces maverick buying and ensures compliance to the organization’s purchasing guidelines.

�

E-procurement makes it possible to capture accurate and timely information on every purchase.

�

New reporting and decision support tools now help procurement specialists to scrutinize their buying patterns.

neefch04.fm Page 46 Monday, April 9, 2001 9:27 AM

47

ew reporting anddecision support

tools now help procure-ment specialists to scruti-nize their buyingpatterns, providing moredependable informationon performance, compli-ance, and the effective-ness of comparativebuying practices and sup-plier selection. As wehave already seen, thereare always two types ofcost involved in procure-ment of materials: first,the cost of the goodsthemselves, and second, the cost inherent in the process ofbuying the goods. Accordingly, when making the businesscase for e-procurement, it is important to look beyond justhow the system can help you to shop for competitive pric-ing or receive consistent discounts from suppliers.

PROCESS EFFICIENCIES

When developing an e-procurement business case, it isimportant then to look at three areas of focused improve-ment: process efficiencies, compliance, and leverage.

1

Although you have already begun to get some idea of thescale of process efficiencies that can come from automatingthe procurement process, it is worth noting that there areseveral ways that an e-procurement system creates cost sav-ings. The first and most obvious are the savings that comefrom automating the process, eliminating paperwork andhuman intervention, and reducing transaction costs andcycle time. These savings come not only from eliminating

N Although there are significant savings to be made through better buying decisions and contract compliance, it is even more important to look at the potential savings to be made from reducing procurement processing or transaction costs through digitizing and streamlining the process, reducing the cycle time, and eliminating unnecessary manual intervention.


48 E-PROCUREMENT

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the errors and time associated with paperwork, but also fromstreamlining and automating the audit trail and approval process.

The second focus area for efficiency savings is more structuralthan procedural, and comes from shifting the selection and orderingprocess back to the employees’ desktop, eliminating the multiplepurchasing middlemen now involved in everyday indirect goodsprocurement, and giving the individual employee the choice—andresponsibility—for purchasing goods. This not only helps to elimi-nate maverick buying and ensure broad compliance with purchasingrules, but also reduces the errors traditionally associated with requi-sition responsibility being passed from person to person through thecentral purchasing and approval chain. Let’s look at each of theseareas more closely.

Process Automation Savings

Cost surveys have recently revealed what was suspected for sometime: that by the time a requisition makes its way through a fax andinternal mail paper maze of approvals to the central purchasingdepartment, administrative costs—typically running from $40 to$150—often exceed the cost of the purchase itself. Accordingly, anygood e-procurement software system today is designed to greatlyreduce the time and effort required to complete purchasing transac-tions by eliminating our traditional paper chain of requisitions,approvals, receiving, and payment reconciliation. The key features ofmost of these e-procurement approaches enable users to find anitem in an electronic catalog, create a requisition, have the order req-uisition routed for approval (if necessary), create and transmit theorder to vendors, and (in varying degrees) help to automate the pay-ment and invoicing process.

There are two key elements to this approach. First, the entire pro-curement process—budgeting, requisitioning, ordering, approval,purchase order development, payment, and delivery—should be com-pleted electronically and, as much as possible, simultaneously, so thatthere is a minimum of manual intervention or delay. Second, theentire process becomes “rebalanced” so that the hundreds of thou-sands of ordinary and uncontroversial purchases take place with theminimum of supervision or human intervention, and only “excep-tions” are flagged through exception reports for the attention of pro-curement specialists or management.

At the heart of this system is the online catalog, usually assem-bled and maintained by the supplier (and, at least today, optionally


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49

residing either on the buyer’s internal systems or on an external third-party portal). These catalogs provide information such as productdescriptions with clear specifications and sizes, availability and leadtimes, delivery policies, schedules, and the negotiated terms, condi-tions, and discounted prices of items. The requisition and approvalprocess is activated automatically, and the system then converts therequisition into electronic purchase orders that are automaticallyintegrated into the buyer’s ERP and back-end systems. Aside from thecatalogs, most good e-procurement systems also then include:

�

Requisitioning.

The system should provide customized sup-plier lists and electronic catalogs, which can be searched usingpowerful search engines that help employees to quickly locatewhat they want to purchase by broad category, part description,or supplier. These databases can be customized by group ordepartment, and include security systems based on passwordsand authorization. The system should also provide comparativeproduct and pricing information, online standard forms, con-tracts, hyperlinks to supplier Web sites and RFPs (Request forProposal), and user-friendly purchasing negotiation tools fornonspecialists.

�

Approval routing.

All good e-procurement systems providean automated, e-mail-based approval workflow tool that can becustomized around approval parameters and can be set to auto-matically prioritize according to required date. They also ensuretimely approval by electronically appearing on the approvingmanager’s screen, and if no response is received, moving onautomatically through a series of deputies.

�

Order management.

This includes consolidated and auto-mated ordering, shipping and reordering, and receiving andinvoice approval functions. The requisition numbers and pur-chase order numbers are automatically reconciled, removing thetedious and inaccurate “rationalization” process that takes up somuch employee time today. Paper requisitions totally disappear.Good systems also provide for real-time order tracking and req-uisition status.

�

Summary billing and consolidated reporting.

The systemautomatically notifies accounts payable, without having to pro-duce a paper-based invoice or to match against the original req-uisition form. There is an accurate and auditable posting of allpurchases and costs, providing the company with informationon committed costs at the instant that they are recorded.


50 E-PROCUREMENT

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�

ERP and CMM (Computerized Maintenance Management)systems integration.

Most e-procurement systems provide anumber of direct links to your company’s ERP procurementmodules and, if procuring blue collar maintenance (MRO)inventory, can provide much higher accuracy and lower inven-tory handling costs by exchanging information on forecasts,purchases, inventory levels, and delivery status directly to andfrom your CMM system.

�

Decision support.

These systems also provide you with flex-ible reporting options that help procurement specialists capturecompany spending history by item, person, department, andvendor, providing the information necessary to predict futurepurchasing trends, estimate workloads, and negotiate bettercontracts with suppliers.

�

Asset management.

Often not thought of as an essential partof an e-procurement solution, the need to provide end-to-endmanagement of resources, once purchased, and to monitor andanticipate the need for replacement has recently driven manysoftware platforms to include asset and cost management mod-ules. Purchasing, of course, is just the first step in the asset man-agement process, and costs related to delayed orders, longapproval times, lost orders, or purchasing IT products withincompatible technologies are increasingly significant—particu-larly as organizations continue to see hardware and softwareproducts proliferate throughout the firm.

The system should be as simple and straightforward as possible,using click-and-order technology with frequently purchased goodsbookmarked and each item presented with a color identification photoand a detailed product description. It should be events-based so that itcan support recurring events, such as training workshops for whichthere will be a need for manuals, flip charts, overhead markers, andcatering. It should seamlessly transcend multiple supplier and catalogboundaries, and support changes to pricing and promotion materialson a real-time basis. And, finally, it should provide strong workflowdirection, including automatic approval deputization, a full audit trail,and instant update of in-house financials and other back-office systems.

Compliance

Rogue procurement, off-contract purchasing, or maverick buying,however described, is an activity that is almost universally acceptedas a part of modern business life. Partly because these purchases are


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51

so often only for small items, and partly because there is no consoli-dated record of the total effect of such purchases, few companiesappreciate the cost associated with noncontract buying.

In fact, though, figures indicate that the impact of maverick buy-ing on organizations can be surprisingly costly. A recent study indi-cates that nearly one-third of all ORM (indirect) purchasing wasconducted off-contract, at an average cost to the company ofbetween 15% and 27%.

2

One obvious effect of providing a universally accessible anduser-friendly purchasing system—particularly valuable for low-value, high-volume items—is that the responsibility for initiatingpurchasing transactions is shifted away from the purchasing depart-ment and into the hands of front-line users, essentially pushing e-procurement to the individual desktop and freeing up central pur-chasing specialists for more strategic work. Because the e-procure-ment software provides for purchasing via preapproved catalogs,purchasing agreements are in place so users know what they areauthorized to buy. The system itself reduces maverick buying andensures compliance to the organization’s purchasing guidelines,which in turn means both lower transaction costs and more certainreceipt of discounts. The system also provides accurate and compre-hensive data on buying, and on the flip side, accurate and timelydata on supplier costs and performance. This clarity on purchasingactivity—possibly most important of all—provides your organiza-tion with the ability to understand the trade-offs between serviceand price.

This “self-service” model requires a good deal of change manage-ment, rethinking your rules, and changing behavior; but is ultimatelythe key to eliminating redundant processes and maverick buying.

Although electronic controls are effective, they are much less obvi-ous than the paper-based requisitions or signed approval slips, andat the outset, may be a little below the comfort level of some manag-ers. If your company is like most of the other companies that haveadopted these systems, with access to the Internet at the desktop,individuals will quickly begin buying through the approved Websites and using a variety of electronic marketplaces. But as long asmanagerial controls are maintained, the ability to purchase viaapproved suppliers and under pre-negotiated contract terms isassured.


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MICROSOFT AND MS MARKET

MS Market is Microsoft’s

®

intranet-based corporate procurement appli-cation that provides employees with the tools they need to place orders for products and services, easily and efficiently, from the con-venience of their desktops. Linking directly with SAP R/3, Microsoft’s current enterprise resource plan-ning solution, MS Market stream-lines order processing, facilitates efficient billing, and reduces administrative overhead. By simpli-fying Microsoft’s corporate procure-ment processing, MS Market has helped reduce per-order processing costs from $60 to $5

saving the company over $7.3 million each year.

Like other companies in today’s competitive marketplace, part of Microsoft’s

success stems from con-tinuing efforts to contain operating costs while providing employees with leading-edge materials and services they need to be produc-tive. Prior to 1996, Microsoft’s cor-porate procurement process relied on dozens of paper forms and mul-tiple custom applications for pur-chasing goods and services. Processing the wide variety of online and paper order forms was costly, inefficient, and prone to manual data-entry error, in addi-tion to being difficult for both employees and suppliers to manage order delivery and payment.

With thousands of weekly pur-chase requests of less than $1,000

each, high-volume, low-cost trans-actions represented 70% of Microsoft's corporate procurement business. Significant resources were dedicated to processing these transactions, including redundant manual data-entry.

In July 1996, an innovative new Web-based application named MS Market was launched to Microsoft employees. MS Market is an online ordering system that works on Microsoft's intranet. It provides employees with easy-to-use, online order forms for office sup-plies, computer hardware, busi-ness cards, catering, vendor contracts, business shipping, and travel services. MS Market validates information such as pricing, ensures that each order is linked to the appropriate accounting code, and automatically routes orders to managers for approval notification via e-mail. According to Lisa Haist-ings, Senior Product Manager, Cor-porate Procurement, “We developed MS Market specifically to stream-line requisitioning processes and allow us to leverage high-volume transactions to negotiate better pricing with our suppliers.” World-wide, MS Market handles over 400,000 transactions and more than US$5 billion per year in com-pany orders. Microsoft uses the vol-ume of transactions to negotiate discounted pricing with selected suppliers, for additional savings to the company.


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53

Revolutionizing Procurement Processing

Within the first year of operation, MS Market helped the Corporate Procurement Group reallocate 17 of the 19 employees that were previ-ously responsible for processing orders, allowing them to focus on analyzing procurement data and negotiating volume discounts with vendors. In just over four years of operation, MS Market has saved the company millions of operations dol-lars, improved the ability to negoti-ate volume discounts from suppliers, and reduced per-order administrative costs from US$60 to just $5.

In addition, MS Market has dra-matically changed the way employees manage business requi-sitions and allocate company

resources. Employees now place orders online, typically in less than 3 minutes, without being bur-dened by administrative paperwork and cumbersome bureaucratic pro-cesses. The success of MS Market has led Microsoft to include a tech-nical template for the application with Site Server, Commerce Edi-tion, along with sample sites that can be used to set up custom e-commerce intranet-based solutions. “MS Market has contributed greatly to reducing corporate procurement costs,” noted Haistings. “In the past four years, it has saved Microsoft a total of US$18 million dollars.”

Source: microsoft.com/business/HowMicrosoftWorks/casestudies/msmarket.asp. Portions reprinted with permission from Microsoft Corporation.


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The very fact that indirect, and particularly ORM goods, are soeasy to select and buy, of course, makes this area the first to be tar-geted for streamlining and automation. As you will see in Chapter 5,there is a logical progression in terms of software and support offer-ings that for the past two years has focused on straightforward indi-rect purchasing, but is quickly shifting toward the more complexpurchasing decisions of MRO and direct materials.

Leverage

One of the most important and beneficial effects of an e-procure-ment framework is that, for the first time, business information sys-tems are so well integrated that they can provide an organizationwith the key total cost data that allow them to make considered deci-sions on purchases, discount requirements, and supplier partner-ships. In many ways, it is only now that the Internet and advancedsoftware systems make it possible to capture accurate and timelyinformation on every purchase, that companies can analyze complexbuying patterns and make truly informed decisions on strategicsourcing options.

Accordingly, one of the most important advantages that comefrom an e-procurement infrastructure is that robust new reportingand decision support tools now help procurement specialists to scru-tinize their buying patterns, providing more dependable informationon performance, compliance, and the effectiveness of comparativebuying practices or supplier selection. A key area, for example, in theglobal supply chain, is often-overlooked extra costs or cost savingsassociated with customs duties or export taxes. Purchasing an itemfrom China less expensively may result in a customs tax that negatesthe savings, while paying more for the same item from a secondcountry, even at a higher price, might mean an overall savings.

Accordingly, reporting capabilities should

�

Provide a better understanding of users’ behavior.

�

Strengthen relationships with vendors.

�

Accurately record vendor performance.

�

Reduce off-contract or maverick buying.

�

Provide exact figures on process cost.

�

Calculate any legal or tax consequences of the purchase.

Not only does this allow for better strategic and tactical buying,but all of this frees up staff to work on other things, including ana-


E-PROCUREMENT


55

lyzing best performance, working with suppliers to improve cost-effective relationships, and renegotiating performance rewards.

STRATEGIC SOURCING

Over the past decade, particularly, one of the ways that companieswere encouraged to overcome a myopic focus on price and to concen-trate on true costs was strategic sourcing, which in many waysamounted to little more, at times, than vendor rationalization. Theseefforts at strategic sourcing are predictable—survey purchasing cate-gories, trawl through the company’s purchasing history in order tocreate a list of the vendors currently being used, reduce the number ofsuppliers, and then renegotiate prices with the remaining preferredvendors—if not always sustainable, and have been notoriously ineffec-tual over the long run. Specialist needs, new discount offers, friendlysales representatives, and urgent spot buys soon meant that vendorcategories blurred and the supplier ranks grew again. Employeesbegan to demand second-choice auto rental options and senior execu-tives exempted themselves from restrictions on flying first class. Thereal problem was that no one ever understood or believed in the num-bers. It is only when costs, performance measurements, and compari-sons can be made accurately and in real time, with an unambiguousaudit trail, that the benefits of strategic sourcing can be sustained. It isthe combination of certainty of cost and performance data and theavailability of decision support tools that allow companies to trulyunderstand which sourcing options are the most effective.

On the other hand, for those firms that can resolve this contra-diction internally, new e-procurement strategic sourcing and deci-sion support tools can now free up procurement specialists’ timeand provide them with valuable information, both on internalspending and on supplier performance. The SAS Institute, for exam-ple, provides strategic sourcing and data-mining tools that allowusers to understand exactly what, how, and from whom the com-pany is buying, and at what price. This information can then becompared with supplier financial or delivery performance. Thisgives procurement specialists an opportunity to understand muchmore clearly the total procurement costs—to look at spending pat-terns and to analyze where the company is being hit with major pricediscrepancies or transaction costs. They can then renegotiate con-tracts or change the purchasing practices, as necessary.


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ATLAS SERVICES AND TRADEC

Irvine, California-based Atlas Ser-vices is a subsidiary of VEBA Elec-tronics. The company provides semiconductor programming, con-signment/stores, automatic replen-ishment, manufacturing management, prototype support, and vendor-managed inventory services throughout North America, Europe, and Asia.

In March 1999, the company conducted a detailed process study of its quotations group to quantify the benefits of the TRADEC.com e-procurement system it had imple-mented from San Jose, California-based TRADEC.com.

Atlas’ quotations group services all of its North American business. Requests for quotation (RFQs) are routed to a central processing loca-tion from local offices across the country. The group typically gener-ates 18 to 20 proposals per month, with the average bill of materials (BOM) consisting of 300 line items. Atlas’ supply chain consists of more than 300 suppliers, with 25 of these considered “preferred.” Pre-ferred suppliers quote the majority of the RFQs, with the remaining 275 suppliers receiving only occa-sional RFQs.

To quantify the benefit of the e-procurement system, a business process approach was used. First, the original business process was mapped, and critical data points were identified. Data points included the time spent by individ-uals on each process step.

Data was gathered for four weeks, using both the original pro-

cess and e-procurement system. The original (manually based) quote process included 17 process steps, 51 faxes, and 3 data re-entries. Quote turnaround time is defined as the total time from when a system original equipment manu-facturer (OEM) sends an RFQ to the time that quotation is returned to the OEM.

At the end of the four-week period, the data was analyzed using two methods: full-cost alloca-tion and activity-based costing. Full-cost allocation assumes that 100 percent of each individual’s time was spent processing RFQs; activity-based costing measures the cost of each step in the process based on the time actually spent performing the step. The result is a high-contrast snapshot of the power of e-procurement.

With standard procurement: The average quote turnaround time under the original process was found to be nine business days—with a maximum of 15 business days. Using the standard procure-ment method, the quotations group spent 10 percent of the nine-day process (i.e., approximately one day) preparing and sending the RFQ to suppliers. They spent another 8 percent analyzing the returned quotations and preparing a proposal for the system OEM. The interim time—82 percent—was spent waiting for supplier responses. More than seven of the nine days were outside the quota-tion group’s control. The original quotation process used a staff of six


E-PROCUREMENT


57

quote administrators. With full allo-cation, the average cost of prepar-ing a proposal was $868. With the average BOM being 300 line items, the average cost of quoting a line item was $2.89.

With e-procurement: After implementation of the TRADEC sys-tem, the number of process steps was reduced from 17 to 13. Faxes and data re-entry were eliminated. The total time spent handling the RFQ by the quotations group was reduced from 17.7 hours to 9.2 hours, an improvement of 48 per-cent. The quote turnaround time was reduced from 9 to 6.5 days, an improvement of 27 percent. Of the time saved, 40 percent came from internal processes while 60 per-cent came from faster supplier response. On an activity basis, the total cost of processing an RFQ was reduced from $204 to $67, a 67 percent improvement.

Several months after comple-tion of the study, the results were further validated when the quota-tions group was able to grow their

business while simultaneously reducing their staff by 50 percent. Today a staff of three handles a greater workload than the original staff of six. (The other quote ana-lysts have been redeployed to other areas within the company).

With full cost allocation, the average cost of preparing a pro-posal is now $434, or $1.44 per line item—a 50 percent reduction over standard procurement.

Other benefits cited by Atlas include increased accuracy and higher job satisfaction among quote analysts. “The TRADEC system eliminates many of the mundane tasks conducted by quote analysts,” says Jim Smith, president of Atlas Services, North America. “Now they can concentrate on building rela-tionships, providing customer ser-vice, and thinking strategically—all of which are more satisfying.”

Source: Weil, Marty, “Buying Into e-Procurement,”

MSI: a B2B magazine about IT for Manufacturing Manage-ment,

May 2000, v.18, i5, p. 47.


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Many contend, though, that with the development of exchangesand auctions, the very notion of the advantages of strategic sourcingis challenged. It is certainly true that the more suppliers involved in abid, the more likely you are to be able to negotiate a better overalldeal, and particularly for low-cost, high-volume purchases of indi-rect materials, strategic sourcing and vendor rationalization may beworking against competitive forces. After all, if competition is sup-posed to result in commodity pricing, the more vendors the better.This is particularly true since there will be no longer a need for a“relationship” or negotiated discounts.

THE CHANGING ROLE OF PROCUREMENT SPECIALISTS

One key area of change is that of the traditional purchasing role andthe changes to traditional centralized versus decentralized purchas-ing strategies. They may essentially become one, at least for MRO,except for a small number of overseeing procurement specialists.This elimination of labor and reduction in cycle time can and will beenormous in terms of savings.

One thing that is certain is that the role of the purchasing profes-sional will change dramatically over the next few years

(see Figure4.1)

.

There is a good deal of speculation as to what this role mightbecome. Certainly, any position that currently deals with paper-based transactions will be gone, and depending on how extensively acompany pursues a strategy of buying via the impersonal e-markets

E-Procurement Roles

• Paper-based catalogmanagement

• Paper-based reconciliationand “order chasing”

• Limited strategic sourcing

• Electronic catalog andcontent management

• Internal purchasingpolicy development

• Compliance

• “Super User” decisionsupport

• Vendor managementand service-level negotiations

Paper-based Procurement Roles

Figure 4.1 The changing role of procurement specialists.


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59

and third-party trading hubs, the role of relationship manager willchange dramatically. If a policy of close vendor ties for mission-criti-cal direct materials continues, and strategic sourcing continues to beimportant, there will always be a role for specialists who understandsthe manufacturing process and the comparative merits of variousmaterial and substitutes.

There will also be a need for purchasing officers with good clientmanagement skills to focus not only externally on the buyer-sellerrelationship (contract management and strategic sourcing), but alsointernally, within their own firms, to ensure communication andpurchasing policy effectiveness throughout the organization. Simi-larly, there is likely to be a need for specialists who can help developand continuously update the rules that govern the relationshipsbetween suppliers and their companies. Someone—often a personthese days known as a

super user—

will need to master the sophisti-cated decision-support tools that are becoming available in order toadvise and help set the buying criteria themselves. To these we canalso safely add roles for employees working on catalog managementand, whatever the potential of a self-governing “self-service” pro-curement system, someone working on managing, or at least over-seeing, compliance.

Strategic team-based purchasing is the one approach that hasdeveloped in the past several years that promises to be enhanced bythis shift toward online procurement, because the rationalization ofthe purchasing process that takes place during an e-procurementinitiative tends to help purchasing specialists to view the process bywhich they acquire direct materials, particularly, as much more hor-izontal and seamless. The certainty of monitoring compliance thatcomes from the e-procurement systems also means that procure-ment specialists in different departments now view purchasing as acorporate rather than a unit function.

ENDNOTES

1. These three categories were first used, to my knowledge, by Price-WaterhouseCoopers in describing e-procurement savings, and stillseem very appropriate.

2. Billinge, Colin, ‘Everyone Needs a Leader,’ in “UnderstandingE-Procurement,”

The Financial Times

, Winter 2000, p. 14.


CHAPTER

Objective

CHAPTER

60

5

The E-Procurement Software Landscape

In order to better understand the current trends in Inter-

net-based e-procurement, it is important to review sev-

eral of the key events that have occurred in the evolution

of e-procurement so far:

�

E-procurement came about in the late 1990s as an improvement of EDI technologies and as a way to conduct purchasing transactions over the Internet.

�

Originally based on electronic catalogs, the complexities of catalog maintenance quickly gave rise to third-party hosting.

�

With the expansion of software capabilities, the original one-to-many model gave way to a second, many-to-many model of procurement.

�

The many-to-many model then provided the impetus for entry into the e-procurement arena of many new and powerful parties.


61

or anyone followingthe whirlwind devel-

opments of the e-procure-ment world—and thatshould be nearly everyonein business these days—the e-procurement mar-ketplace must seemincredibly volatile anduncertain. There are sell-side and buy-side application suites, e-procurement net-works, vertical and horizontal exchanges, and third-party e-hubs and portals. How can anyone make sense out of theseemingly endless mix of these e-business offerings?

To try to add some clarity around the situation, it canhelp to simply look back over the e-procurement landscapeas it developed over the past few years in order to betterunderstand these market machinations.

THE STORY SO FAR

It is only necessary to goback a few years to enterinto pre-e-procurementhistory. Prior to 1997,electronic exchange ofinformation concerningpurchasing was prettymuch limited to either

faxed purchase orders, or for a select group of large and pro-gressive companies, to Electronic Data Interchange (EDI).In fact, for most people in business, EDI is still synonymouswith electronic procurement. It is true that large companieshave been using EDI with their major trading partners foralmost 25 years now, but these EDI systems were based onleased lines, were expensive to establish and to use, and were

F To appreciate the complexity and volatility of this marketplace—and also the potential levels of profit up for grabs—it is only necessary to look at the number and types of organizations that are rushing to take part.

EDI (Electronic Data Interchange): a dedicated electronic connection, usually between buyers and their largest selling partners, used for transfer of purchasing information.


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hindered by a lack of agreed-upon standards—most of which weredesigned for, and therefore proprietary to, certain industries. What ismore, it has always been too complicated and too expensive forsmaller enterprises to set up a dedicated EDI connection (the costaverages between $25,000 and $40,000), and as the global economymoved into its current phase, it became apparent that EDI would befar too complex and cumbersome to exploit the extended enterpriseand global trading communities that were emerging.

E-procurement really began in the late 1990s when several start-up software companies, led particularly by Ariba and CommerceOne, began to develop a suite of applications that allowed vendors tocreate electronic catalogs. It began inauspiciously enough. Most ofthose original software providers, still unaware of the impendingexplosive growth of the Internet, created products that, althoughcapable of transmitting over the Internet, would still reside withinthe firewalls of the buyer company, and were for the most partfocused on ORM and MRO types of vendor products. Because ven-dors seldom had either the skills or IT capacity internally to create ormaintain those electronic catalogs, these software suites were prima-rily designed from a “buy-side” point of view, and responsibility forcontent management, daily maintenance, and troubleshooting, allfell to the buyer’s staff.

However, loading and managing large, and often badly orga-nized, supplier parts information in electronic catalogs turned outto be much more time consuming and difficult than the buyers hadoriginally bargained for. It suddenly became the responsibility of thebuyer company’s staff to deal with the complexities of aggregatingthe content of multiple vendors’ catalogs, revising and cross-match-ing prices against discounted service agreements, and constantlyupdating and editing product changes.

Moreover, not only were there no agreed-upon standards forcontent management and presentation, but there were no agreed-upon standards for communicating over the fast-growing Internet.Initial attempts to shift EDI to the Internet had proved equally diffi-cult, and even by 1998, a study by the Aberdeen Group concludedthat not a single organization they surveyed had been able to con-nect more than a handful—10 to 15 suppliers—electronically totheir systems.

1

It soon became apparent that this original buyer-managed modelwould never be successful, because the burden on the buyer’s staffwas simply too great. Realizing this, several of the e-procurement


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software companies stepped forward and offered to take on theresponsibilities for maintaining the catalogs on behalf of the buyers—essentially providing an outsourcing service on behalf of many ven-dors and large buyers. They would customize and maintain the cata-logs, coordinate communication methods, and then either update thebuyer’s server on a regular basis via downloads through the Internet,or alternatively, would simply host the catalogs on their own servers,which they would then share with buyers through a Web site portal.They therefore became the intermediaries between the buyer hub andthe vendor spokes.

It didn’t take the industry long to realize that they were on to agood thing here, and several companies soon began to offer com-plete outsourcing services, which included developing and main-taining registries of preferred suppliers, and even going so far as toprovide contractual and legal services, performance managementtools, and logistics support.

This shift toward third-party hosting, of course, was the sparkthat ignited the explosive and volatile expansion of the entire e-pro-curement industry. In a short period of time—less than two years—a dramatic change occurred. Instead of focusing on internally heldsoftware that buyers had to maintain—or pay to have maintained—buyers and vendors could be provided the same service over theInternet through portals on a subscription basis. Moreover, with theresponsibility for catalog management no longer sponsored andcontrolled by a single buyer, it was a logical next step to make thosecatalogs available on a similar outsourced basis to many buyers whohad similar supplier needs.

This brought about two changes that would alter the e-pro-curement industry forever. The first was that the

one-to-many

model, which had been the basis for all e-procurement systemsdesigns, suddenly shifted into a

many-to-many

mode. The idea of ahub-spoke relationship in which a single organization wouldarrange to electronically procure goods from a handful of pre-ferred suppliers (essentially the EDI model moved to the Internet)was suddenly rendered obsolete. Although it still proved attractiveto a number of large companies with specific supplier needs, forthe most part, the proprietary company extranet—at least as far ase-procurement was concerned—had suddenly and unexpectedlybecome an anachronism.


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The second change—whichwent hand-in-hand with the real-ization that a hosted, many-to-many model was infinitely morelogical and profitable than a one-

to-many model—was the remarkable explosion in electronic mar-ketplaces, online auctions, industry portals, and trading hubs thatcame about over the span of a few months. These specialist e-mar-kets and third-party trading hubs blossomed in virtually everyindustry vertical—automotive, energy, petrochemical, steel—as wellas in many horizontal markets, such as office supplies and travel ser-vices. There are today third-party providers that host virtual shop-ping malls, online trading exchanges with various types of onlineauctions, and innumerable types of hosted services—ApplicationService Providers (ASPs)—that furnish full Web-based e-procure-ment and e-fulfillment services. Each of these providers serves as acentral electronic site that brings suppliers, distributors, and buyerstogether over the Internet, often boasting a bewildering array of ser-vices, including dynamic pricing, Customer Relationship Manage-ment (CRM), arbitration and negotiations, and full e-fulfillment.

Added to the complexity of this ever-changing marketplace arethe many new and powerful parties that have plunged into themorass. These include the original e-procurement software houses,various newcomers, an assortment of Internet service providers,the major ERP vendors, the large and influential supply chainmanagement software suites, catalog maintenance providers, and abroad array of technical support organizations that provide trans-lation, interface, and interoperability services. There are also—formany of the vertical exchanges—large and financially powerfulindustry representatives who are busy aligning with various sup-port partners in multibillion dollar collaborative exchanges. Apartfrom millions in venture capital funding, these collaborativeefforts are often given additional financial backing by large inter-national banking concerns.

To appreciate the complexity and volatility of this market-place—and also the potential levels of profit up for grabs—it is onlynecessary to look at the number and types of organizations that arerushing to take part.

ASP (Application Service Provider): a third-party host that provides Web-based services.


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E-PROCUREMENT SOFTWARE SPECIALISTS

At the heart of the e-procurement revolution are several companiesthat over the past few years have been building increasingly powerfuland flexible software platforms specifically dedicated to online pro-curement. These include increasingly familiar names, such as Ariba,Commerce One, ProcureNet, Intelisys Electronic Commerce (nowMetiom), Sun Microsystem/Netscape, and Broadvision, to name afew, many of which originally developed online procurement soft-ware suites that were intended to help usually large and financiallypowerful companies to develop dedicated, one-to-many enterprisesystems. Companies such as Concur Technologies, Clarus, Trilogy,and Remedy all provide “light” systems for the mid-size and smallercompany market.

These software suites have all the basic procurement functional-ity that you might expect. They allow for online catalogs, whichtoday can be managed either by the vendors, by the buying enter-prise, or more often these days by ASPs or other third-party groups.They allow employees, either from central purchasing or from thedesktop, to electronically search for items; compare prices, func-tions, and availability; choose different payment methods; requisi-tion the materials; and track materials delivery.

As we have seen, these suitesoriginally focused on the muchmore straightforward purchase ofindirect goods, but lately havemoved into providing moreadvanced functionality for thecomplex purchasing of directmaterials. As this drive toward direct materials continues, thesecompanies are beginning to form alliances with providers of supplychain support applications, including those that can round out theire-procurement solutions with CRM, strategic sourcing, or advancedplanning and scheduling (APS) functionality. Ariba, for example,purchased Supplier Market.com, an online workplace for manufac-turing materials, which it intended to use as part of its direct sourc-ing infrastructure. Similarly, Commerce One has teamed up withAspect Development, Extricity, Andersen Consulting, and otherpartners to create a direct-materials portal.

CRM (Customer Relationship Management): a software platform that provides customer history, order tracking, and sales information online to customer service agents.


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The major e-procurement players have also all begun to developa two-pronged approach to implementation that reflects the shiftfrom the one-to-many to the many-to-many model. Not only dothey provide a software platform that can be maintained by the buy-ing enterprise (one-to-many), but they now also provide a separateplatform that exists as an independent “network” (many-to-manymodel). For example, Ariba provides an enterprise suite—ORMS(Operating Resource Management Systems)—and also a subscrip-tion-based, e-community portal network through its Ariba NetworkPlatform. Commerce One’s enterprise solution is BuySite, and itsnetworked e-community platform is MarketSite. Metiom (formerlyIntelisys) has the ConnectTrade product suite for both its enterpriseand network offerings.

As we have already seen, these networked platforms provide anindependent, portal-based trading community that often supportsthousands of suppliers with most of the same level of functionalityas the enterprise procurement platforms, including requisitioning,tracking, and payment services. These networked solutions, bothsponsored by the software creators and sold to independent groups(third-party ASPs and market creators) interested in using these net-work portals to develop their own industry exchanges, have beeninstrumental in the explosive growth of vertical trading communi-ties. As these network solutions have become more popular, theirfunctionality has been expanded to include important business ser-vices, such as content management tools, integrated payment sys-tems, easy vendor registration, advanced search and comparisontools, strategic sourcing and decision support systems, and other keybusiness support services. Commerce One’s MarketSite, for exam-ple, also includes payment services from American Express, taxassistance and tools, and logistics and freight delivery services prear-ranged with UPS and TanData Corp.

The great advantage of these networked offerings is that they pro-vide even small and medium-sized third-party sponsors with essen-tially a “ready-made” trading community platform.

This type ofopportunity has been enhanced even more lately, as specialist ven-dors use their memberships in horizontal network exchanges—suchas Ariba’s Internet Business Exchange, designed to provide a hori-zontal platform with full exchange and e-procurement functional-ity—in order to develop their own industry-specific verticalexchanges within those horizontal networks. Known as

on-ramps,


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these exchanges allow members of any size to build up their market-specific content and supplier catalogs—essentially developing theirown trading community while never having to build or take respon-sibility for ownership of the software themselves.

ERP SUPPLIERS AND E-PROCUREMENT

Lumbering along with (and slightly behind) these procurement spe-cialist companies are the many ERP suppliers. These giants—SAP,Oracle, PeopleSoft, Baan, J.D. Edwards, and others—have a long his-tory of providing procurement functionality, because purchasingwas an integral part of their supply chain modules that have beendeveloped over the years to integrate with Material RequirementsPlanning (MRP) and Computerized Maintenance Management(CMM) systems. Not only do ERP suites provide financials (generalledger, accounts payable, accounts receivable, etc.), but they also spe-cialize in automating functions throughout the supply chain (ware-house management, procurement, manufacturing, order processing,etc.), and so provide both the transaction backbone and data sourcefor decision support systems.

Their extensive supply chain and procurement expertise,although never based on Internet technologies in the past, nonethe-less gives them reason to claim that their software platforms are therightful place for procurement functionality, particularly—becausetheir systems provide the backbone for both supply chain and finan-cials—if it involves complex procurement and replenishment ofdirect materials for manufacturing companies. They also claim arightful inheritance to e-procurement participation because not onlyhave ERP software suites traditionally contained a good deal of pro-curement functionality, but in order to be effective, any e-procure-ment system will still need to tie directly into the ERP systems of bothbuyers and sellers in order to track order receipts and payments.

Accordingly, there has recently been a scramble for strategic alli-ances between all the major ERP and e-procurement software ven-dors. For example, ProcureWorks integrates with Oracle, PeopleSoft,and SAP; and Ariba has a three-way partnership with i2 (tying intoits TradeMatrix supply chain software) and IBM, which provides atransaction engine with its WebSphere Commerce offering. Aribaalso has partnerships or alliances with PeopleSoft, Oracle, and J.D.Edwards. Commerce One supports SAP’s ERP suite under its GlobalTrading Web portal.


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Worth noting also is that both Oracle and PeopleSoft havealready begun to pursue a bold dual strategy—integration withmajor e-procurement suites and a parallel strategy of building theirown e-procurement capability. PeopleSoft has a standalone e-pro-curement product that is tightly integrated with its ERP and finan-cial modules, and Oracle boasts of interoperability with other e-procurement packages, but also has a strategy of providing a varietyof Internet-enabled procurement products, such as OracleExchange.com, a marketplace that supports procurement for indi-rect materials.

Supply chain management specialists have also joined the race toproduce e-procurement platforms. i2, for example, leverages itsknowledge and software designed for direct procurement (TradeMa-trix Procurement Services), and apart from its alliance with IBM andAriba, also has merged with Aspect Development for even greaterMRO and direct materials purchasing capability. Metiom andManugistics, the manufacturing and supply chain decision supportsoftware group, announced an alliance designed to help sellers andbuyers integrate their e-procurement and supply chain capabilities.

During the past few years, the development of powerful forecast-ing and planning tools has brought important productivity advancesto the manufacturing sector. Over the past decade, demand forecast-ing has moved from a rudimentary dependency on historical produc-tion data used to predict broad, macro trends to a much moresophisticated approach to forecasting and planning production needsusing causal data (promotions, seasonal changes, etc.). Today’s pow-erful APS systems—Manugistics, SynQuest, Numetrix, and manyothers—can now provide a firm with sophisticated, real-time, com-puter-driven predictions for production and purchasing demanddriven by actual sales or distribution needs. As sales force automationor online order fulfillment systems capture orders, these are nowtransmitted directly via the Web, essentially providing a “pull” for thepurchasing and manufacturing groups. These systems therefore com-plete what is essentially the full automation of the supply chain,greatly reducing the need to maintain costly safety stock because ofuncertainty about demand. Of course, to create this type of fully col-laborative supply chain, a firm needs to tightly integrate a suite ofproducts that extends from sales force automation through to fore-casting tools, the ERP backbone, the online e-procurement system,and ultimately, into the suppliers’ systems.


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For this reason, another group of software vendors—thoseinvolved in planning and forecasting—have entered the direct e-pro-curement scene, with companies such as i2, Manugistics, and anynumber of point of sale (POS) vendors now joining alliances withother platforms to complete the Internet-based supply chain (seeFigure 5.1).

Moreover, because in the future customers will both initiate anddrive their own purchases through the entire supply chain, andbecause instant or customized sales require customer service agents tobe able to provide real-time availability and delivery information tocustomers, CRM systems are now being seen as critical to the full inte-gration of the e-procurement process. In fact, in great measurebecause of the interrelated nature of CRM with the growth of B2B e-commerce market, the CRM marketplace is predicted to have a sweep-ing renaissance, growing from $2.3 billion in 1998 to $16.8 billion in2003.

2

For that reason, there have been any number of moves by bothe-procurement and ERP vendors to align with CRM platforms.

TRANSLATION AND CONNECTIVITY

Recognizing that many companies will want to pick and chooseamong several e-procurement systems, ERP suites, supply chain sys-tems, and portal platforms, companies such as Extricity and Web-Methods have developed XML-based solutions that integrate thesevarious platforms and applications. Both Ariba and SAP use Web-Methods and other third-party packages to link suppliers and part-ners, and to provide for additional third-party software links.Others, such as Neon and Lotus, provide adapters or converters spe-cifically designed to integrate various leading procurement andInternet applications. PeopleSoft has its Open Integration Frame-work (OIF), which uses XML to integrate its ERP modules withother products; Oracle uses the Open Applications Groups’ XMLmethodology to add third-party software links to its ERP solutions;and IBM uses its own B2B Integrator software to tie into third-partysoftware.

Many industry observers continue to point to Microsoft as anup-and-coming key member of the e-procurement community ofvendors, not only because of its MS Market online procurementsuite, but also because, for many customers, compatibility with theMicrosoft business software platforms is essential in order to providea procurement functionality directly to the employee desktop. One


70

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of the biggest selling points touted by Clarus, for example, is itsfocus on Microsoft technologies. Microsoft’s BizTalk is an XML-based product that allows interconnectivity between Microsoftproducts and ERP systems, portals, and a variety of third-partyapplications. Microsoft is working closely, however, to also integrateAriba’s XML schemas (cXML) into the BizTalk XML framework,and Ariba’s ORMs procurement application runs on the Microsoftplatforms.

PAYMENT SYSTEMS

Finally, there has also been a rush to integrate into the e-procure-ment solution a method for secure and easy-to-use electronic pay-ments. This has meant a similar scramble among e-procurementsoftware vendors and ERP companies to form collaborations withmajor financial services groups, which has revitalized the laggingmarket demand for the corporate purchasing card.

It is not difficult to see the value of these online payment sys-tems. In fact, it is absolutely critical to the overall effectiveness of anye-procurement initiative, simply because there can be no purchasewithout payment. Imagine, for example, the difficulties of continu-ing to pay your vendors on a monthly basis by paper checks. Notonly is the paper-based system cumbersome and expensive (a typicallarge company may cut as many as 1,000 checks each month forindirect materials alone), but without corporate purchasing cards,the e-procurement process becomes—at least for a short time—manual and disjointed again. A simple payment card, assigned to anindividual employee with a personal PIN, is both convenient andsecure.

A recent survey conducted by the National Association of Pur-chasing Management on behalf of Visa USA found that nearly one-third of companies that have adopted e-procurement systemsalready use purchasing cards, and another 57% intend to incorpo-rate purchasing card technology in the future.

3

Accordingly, developments have continued apace, and most e-procurement systems now boast one or several alliances with largecredit card and financial transaction companies for both online pay-ment reconciliation and distribution of corporate purchasing cardsto employees. For example, SAPMarkets will use the AmericanExpress Corporate Purchasing Card, and Mastercard will provide


Cas

e St

udy

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online payment services to e-procurement solutions from Microsoft,Clarus, and Commerce One. Bank of America has formed an alli-ance with NIC Commerce to provide electronic payment and pur-chasing services to state and local governments in the U.S. Thesepayment card programs will provide a network of global merchantcredit approval, purchasing control features by card, and detailedline-item reports on use—all of which will help firms to monitorand better understand their purchasing activity.

FINDING YOUR WAY THROUGH THE MINEFIELD

This sudden explosion of activity has left a multitude of businessopportunities and is proving to be a boon to the economy globally.But it also leaves many dazed and wondering what to do next. Manyquestions arise:

�

Are all one-to-many structures truly obsolete, or does it stillmake sense for some organizations to have a dedicated—even ifoutsourced—procurement hub?

PURDUE MOVES TOWARD PURCHASING CARDS

To streamline its automated e-pro-curement system, Purdue [Univer-sity] will distribute MasterCard-branded purchasing cards that limit the amount individuals can spend. About 1,000 users in four major areas of the university—the chemis-try school, aviation technology school, physical facilities mainte-nance plant, and the North Central campus in Westville, Indiana—will receive the cards at the program’s launch.

After a successful completion of a three-month pilot, Purdue plans to roll out the cards to 2,000 more users a month. By the time the Pur-due system is fully implemented, 15,000 faculty and staff members will be able to use a Web browser

for requisition and approval of vari-ous commodity items.

“The system implementation is the easy part; the hard part is the culture change, the process change, and the enhancement of the secu-rity foundation,” Purdue’s Mike Courtney [manager of the procure-ment redesign project] says. “This is the first Web-based administra-tive system to be implemented by Purdue.”

The goal: eliminate 80% of paper processes within the first two years.

Source: Greenemeier, Larry, “Buying Power,”

Informationweek

Online

, April 3, 2000, pp. 3-4. Used with permission.


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�

Do these e-markets work only for indirect and MRO materi-als, or are they a feasible system for procuring mission-criticaldirect goods?

�

What should your policy in the future be on strategic sourc-ing and vendor management, when third-party exchanges elimi-nate any personal relationship in the future between supplierand buyer?

�

With more than a thousand electronic exchanges now active,will there soon be a period of consolidation fueled by failures,buy-outs, and mergers?

�

If so, is it safe to invest the future of your company in an e-procurement strategy now, or can you afford to wait?

Although many of these questions simply can’t be answered withany degree of certainty at this time, one of the best ways to begin tounderstand your options is to better understand the architecture ofe-procurement itself.

ENDNOTES

1. “E-Procurement: Unleashing Corporate Purchasing Power,” Time,Inc., ©2001 Time Inc., all rights reserved. www.fortune.com/sections/eprocurement2000, retrieved July 19, 2000.

2. Baljko, Jennifer, “Software Firms Seek to Move Beyond ERP,”www.ebnews.com, October 14, 1999.



CHAPTER

Objective

CHAPTER

74

6

The Architecture of Web-Based Procurement

Web-based procurement has developed rapidly into sev-

eral major models, each of which has its relative strengths

and weaknesses:

�

Corporate e-procurement systems usually have either a buy- or a sell-side focus and provide central procurement and desktop requisitioning ability.

�

Electronic catalogs can be managed by suppliers, buyers, or third parties.

�

The development of the independent, Internet-based portal has meant the movement away from the one-to-many model of e-procurement.

�

Electronic trading communities can focus on vertical and/or horizontal industry markets.

�

The need for broader supply chain and procurement services has meant the rapid rise of many ASPs and other third-party support organizations.


75

lthough a few indus-try watchers were

quick to assume that therewould be a continuousand inevitable move away from the one-to-many model ofe-procurement, the complexity of purchasing materials glo-bally, the different approaches that ORM, MRO, and directmaterials purchasing demand, and concerns over securityand partnership reliability have all combined to sustain agood deal of interest in the company-sponsored model.Alternatively, particularly for the more straightforward pur-chasing of ORM materials, impersonal many-to-manymodel auctions and exchanges provide small and medium-sized companies with an opportunity to forgo complex andcostly negotiations with individual vendors, and to use anonline exchange, for a subscription fee, to buy goods at bid-down prices.

SELL-SIDE ONE-TO-MANY: THE STOREFRONT MODEL OR SHOPPING MALL

In order to begin to develop a company strategy for this fast-evolving marketplace, it is important to first understand thenuances of the leading models. They take several forms.

First, they have either a

buy-side

focus (designed pre-dominantly to serve the needs of the buying organization)or a

sell-side

focus (sponsored by and most beneficial to sup-pliers). They are then divided according to whether theyhave a one-to-many focus or a many-to-many focus. Foreach of these combinations, there are then several variationsin approach. To begin, let’s start with the most basic one-to-many model.

In the sell-side one-to-many model (shown in Figure6.1), sellers create their own Internet sites that allow anynumber of buyers to browse and purchase their products

A Which model is best for your organization? Is it one, or is it a mixture of several?


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online, with real-time, contract-specific buying. The responsibilityfor creating and maintaining the catalogs lies with the sellers, andthey use an open Web site, or portal, on the Internet to promotewhat is essentially an online store for their products. Increasingly,they also make their catalogs available to intermediaries (e-markets)either through Internet links or through actual contracts for listingas “preferred suppliers”. These e-markets, which we will discuss in amoment, then provide specialized online focus to particular hori-zontal and vertical industry markets. In many ways, this model ismore e-commerce than e-procurement (a method for selling ratherthan purchasing), except these

storefront

or

shopping mall

portalsnow provide significant opportunity for buyers to purchase goodsonline from all over the world.

The obvious advantage for sellers is that they can create andmaintain their own catalogs. The disadvantage to the system is that,because the storefront is a common portal, it has in the past beenvery difficult to integrate well with the buyers’ back-end financialsystems. This makes life very difficult for the buyers, because noth-ing is automated from their point of view—they still have to locatethe supplier’s Web site, log on, and enter orders manually throughthe catalog Web forms, which, simply because of volume, do notnormally retain the buyer’s template or company purchasing infor-mation. Each buyer must therefore rekey all the relevant profileinformation—company name, address, telephone numbers, accountcodes—each time. Obviously, for a company with hundreds of sup-

Seller

Buyer Buyer

Buyer Buyer

Figure 6.1 Sell-side one-to-many model.


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pliers, this means visiting hundreds of Web sites and continuously

rekeying information. To make matters more difficult, the buyer

then has to simultaneously update his or her own internal ERP sys-

tem. Although this approach has obvious advantages over the pure

paper-based catalog, it is not, by any practical definition, e-procure-

ment, and for companies with more than a few suppliers (imagine

doing this with 50,000 suppliers), the approach hardly seems viable.

As these e-markets have become more popular, however, signifi-

cant progress has been made—using new XML-based standards (see

Chapter 7)—toward making it possible for buyers’ ERP systems to

accept some types of straightforward documents, such as purchase

orders or receipts. But because the procurement process involves

many other types of interaction—discounts, contract terms, buying,

shipping and receiving arrangements—until greater levels of

interoperability are available and more consistent communications

protocol standards are agreed upon, much of the process will remain

little more than an electronically enhanced paper-based system.

Many would also argue that although this type of Internet-based

procurement makes it easier for employees to buy ORM materials,

that same ease of use could easily invite abuse, with employees cir-

cumventing company purchasing policies and freely purchasing

from any online vendor. At a time when maverick buying is seen as

an area of cost concern, this type of setup seems only really appro-

priate for small buyers and one-off purchases.

BUY-SIDE ONE-TO-MANY MODEL

In the buy-side one-to-many model (shown in Figure 6.2), the buyermaintains in-house the catalogs and databases of multiple suppliers’goods and services, and is responsible for tying all transactions intothe company’s purchasing and financial systems. Although the ven-dors (sellers) provide catalogue information on products, services,prices, availability, and so on, the buyer, as host, is responsible forkeeping that information up to date. Most systems will then tie thepurchase order to an electronic invoice, providing for simultaneoussettlement through electronic funds transfer, and through the ERPsystem, will automate the workflow and approval processes. All ofthis is integrated into the desktop-based requisition system.


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It has the advantage of ease of use, and because many of the large

ERP vendors are adding this functionality to their product suites, can

theoretically provide easier and closer ties to internal ERP systems.

The obvious advantages of the buyer-managed arrangement are

that it allows the purchasing department to control the products and

services available on the catalogs and can tie systems—such as pro-

curement cards—directly to employees, setting quantity limits, pric-

ing ceilings, and other criteria. This has been, until recently, the

favored model when attempting to bring the self-service desktop

model to employees.

The buyer-managed model requires, by its nature, a good deal of

buyer-vendor negotiation and collaboration, because the buyer has

taken on the responsibility for maintaining current descriptions of

products, availability, lead times for delivery, and prices. In fact,

despite the current popularity of the online exchanges and subscrip-

tion-based third-party e-markets, this buyer-managed model still

has many proponents. It is a model that has worked well in the past

for very large customers and for groups of customers and suppliers

that have a long-term relationship or a natural affinity to a certain

buyer-seller market.

Within this buy-side model, there are two different areas of

focus: buy-side desktop requisitioning and buy-side Internet-based

central procurement.

Seller

Buyer

Corporate Buy-SideSystem

Seller

Seller

Seller

Seller

Figure 6.2 Buy-side one-to-many model.


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Buy-Side Desktop Requisitioning

This set of software resides both on a company’s intranet and onusers’ desktop PCs, and allows employees to purchase items directlyfrom their desks using preapproved catalogs. Although employeesare given the freedom to purchase goods when they need them,managerial control remains with purchasing professionals, and thereis a full audit trail. Guidelines, discounts, prices, contracts, andapproval levels are controlled by procurement management.

A typical example is Visio, a developer of engineering and draw-ing software, who selected Concur Procurement, Concur Technolo-gies’ Internet-based desktop requisitioning software, as the platformfor an indirect materials e-procurement initiative. The system pro-vides employees with the ability to order materials and track theirdelivery directly from their desktop PCs, with an electronic approvaltree and well-defined order limits. Visio reports that it saved some$500,000 in the first year, with an ROI of less than four months.

Supporters of these desktop requisitioning systems cite the valueof “off-loading” the purchase of day-to-day indirect ORM itemsfrom busy specialists in the purchasing department, and claim thatdesktop requisitioning greatly reduces maverick buying, forcingemployees to purchase indirect goods using prearranged purchaseagreements, and providing for a much more accurate record andaudit trail of indirect spending.

Buy-Side Central Procurement

Increasingly powerful in terms of their performance measurementand decision support capabilities, the major buy-side applicationsallow purchasing professionals (central purchasing) to set parameters,develop contracts, analyze supplier performance, measure transactioncosts, and understand total

true cost

of procurement. Althoughintended for indirect purchasing, increasingly, buy-side applicationsare being adapted for bulk or standardized purchase of direct goods.

The greatest drawback to these buyer-managed systems (exclud-ing those who outsource to ASPs) remains the laborious task of cata-log and system maintenance. Buyer-managed catalogs allow you tostore catalog data on your own premises, with electronic updatesperiodically sent across the Internet by the supplier. But there is sig-nificant effort required in the initial aggregation and rationalizationprocess. In fact, the process is ongoing, and because many largefirms deal with hundreds or even thousands of suppliers in differentcountries, there may be thousands of items that each have multiple


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specifications. Different suppliers have different terms for similarproducts, and various suppliers will provide images in different for-mats, with inconsistent product ID numbers. Accordingly, for thosecompanies who don’t necessarily see catalog and systems mainte-nance as a core competency, outsourcing of these tasks seems anappealing option.

It is also possible, of course, to outsource the design and mainte-nance of product catalogs to teams of information engineers whocan organize and standardize your product catalogs for you. Compa-nies such as Requisite Technology provide both a service and a soft-ware suite (which includes a powerful data search engine) that willhelp standardize the wide variety of product information of multiplesuppliers, and includes the ability to scan paper catalogs.

Even if you decide to outsource these content maintenance andaggregation activities, your systems will need to provide for at leastthree different methods of maintenance access in order to providefor flexibility of policy in the future. The system will need to providefor Web-based maintenance so that suppliers can update their owncatalogs, so that you can update the catalogs yourself, or so that youcan pay a third party to maintain the catalogs for you. It is importantto remember that ASPs vary widely in terms of their support forthese catalog maintenance technologies.

INDEPENDENT PORTAL AND ONLINE TRADING COMMUNITIES

It may well be that the development of the independent portal site(shown in Figure 6.3)—where multiple buyers and sellers can meetelectronically and transact all types of business through a singlepoint of integration—will be one of the most significant events, bothin terms of IT and economic development, since the invention of themicrochip. The portal model, a single Web site entry point availableto anyone on the Internet, worldwide, allows any participant to logon and transact business for a subscription fee, a transaction charge,or a percentage of exchange fee. Activities include viewing catalogs,placing orders (or bidding, in the case of online auctions), and rout-ing payments.

It is probably not hyperbole to say that seldom in history has somuch money and attention been focused so intensively on a singlenew growth area in the economy (see Figure 6.4). To illustrate thepoint, consider that in the spring of 1999, there were around 30 ver-


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Seller

Buyer

Seller Seller Seller

Seller SellerSeller

IndependentPortal

Buyer

Figure 6.3 Independent portal model.

0

$bn

1998

1999

2000

2001

2002

2003

2004

E-marketplaceelectroniccommerce

All otherelectroniccommerce

7000

6000

5000

4000

3000

2000

1000

Figure 6.4 B2B e-commerce forecast. (Source: The Gartner Group as printed in “FT-IT Review 2,” The Financial Times, October 18, 2000.)


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tical e-marketplaces online. By the end of 2000, that number wasapproaching 1,500. There are today representatives from every con-ceivable support area of procurement and supply chain—softwarevendors, hardware suppliers, venture capitalists, and industry-lead-ing organizations from vertical industries—that moved quickly toform collaborations with other interested parties in order to sponsorindustry-focused electronic trading communities. Some analysts,alarmed at the enormous amount of activity in this area, estimatethat there may be as many as 10,000 e-marketplace trading commu-nities by 2003. Volpe Brown Whelan & Co. estimates that e-market-places will account for $35 billion in transactions by 2004.

1

The sponsors for these electronic trading hubs also vary inambition and levels of service. Taking their inspiration from compa-nies such as Amazon.com and eBay, many exchanges are limited toproviding an online many-to-many storefront for multiple buyersand suppliers, usually focused on a single horizontal or verticalindustry sector. In truth, in these early days, most e-markets are pri-marily focused on selling indirect goods often via auctions and a“spot market,” which currently accounts for between 10% and 30%of procurement being carried out over trading hubs today.

VERTICAL E-MARKETS AND MARKETPLACE CREATORS

E-market exchanges and electronic trading communities tend to befocused on either vertical or horizontal markets, so it might beworth looking at the distinction between the two. Vertical markettrading communities tend to focus on one particular industry—steel, paper, electricity, paper, chemicals, home loans—and are usu-ally sponsored, or at least supported, by one or several of the leadingcompanies in that area.

There are hundreds of examples of vertical markets. The chemicalindustry, for example, has shown early leadership in developingonline marketplaces, with more than 50 announced e-markets, whichrange from simple online auctions to complex virtual distributorshipsthat service entire continents. They have an advantage over other ver-tical industries in that chemicals for the most part adhere to well-accepted international standards in terms of naming, quality, content,and quantities, thereby making online auction-type purchasing—where the buyer may have no personal contact with the seller and


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therefore must be certain of exactly what is being purchased—easier.Other vertical industry areas that have rushed to develop e-market-places include automotive, energy, high-tech manufacturing and elec-tronics, communications, publishing, metals, aerospace, financialservices, healthcare, and many more (see Figure 6.5).

An interesting phenomenon has occurred in this area that hassurprised many industry watchers and analysts. A testament to theradical changes that the Internet can bring about, many of these ver-tical e-market trading communities are now being sponsored jointlyand collaboratively by large and powerful industry leaders. Oftenlong-time rivals, these

market creators,

as they have become known,have—by virtue of their industry experience, extensive business con-nections, and financial clout—quickly risen to critical mass tobecome the dominant leaders within the vertical industry electronicmarketplace.

Metals

Business publishing

Office supplies

Communications andother services

2000

1800

1600

1400

1200

1000

800

600

400

200

01998 1999 2000 2001 2002 2003 2004

Utilities

Automotive and othertransportation equipmentHi tech, electronics andelectric equipment

$bn

Figure 6.5 B2B e-commerce forecast by industry. (Source: The Gartner Group as printed in “Electronic Trading Is Expected to Surge,” The Financial Times, October 18, 2000.)


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The Covisint alliance between Ford, General Motors, Daimler-Chrysler, and Renault-Nissan is probably the most famous example.This massively powerful collaboration involves 750,000 tier-threeand tier-four suppliers, 50,000 tier two suppliers, and 1,500 tier onesuppliers, all tied to 14 vehicle manufacturers. As a reflection of theinfluence and power of this group, in return for installing the robustand sophisticated procurement platform, Commerce One will bepaid not only a good amount of cash, but will also collect a portionof Covisint's gross revenues for 10 years, and get a 2% equity stake inthe venture. In return, GM and Ford will share an equity stake inCommerce One worth $1.23 billion.

2

In high-tech manufacturing, a group of 12 important industryleaders, including Hewlett-Packard, Compaq, NEC, Gateway, Hita-chi, Samsung, and others, have joined together to form an electronictrading community that will focus on the estimated $600 billionhigh-tech components and parts market, and will offer open sourc-ing, auctions, and supply planning and logistics support.

In chemicals, giants such as British Petroleum, Dow, Shell,BASF, Bayer, and DuPont have formed an online chemical tradingcommunity that provides for exchange of virtually any chemical-related item, from broad procurement to key product areas such asplastics and laboratory chemicals. There are announced sites foragrochemicals, bulk chemicals, and custom-made chemicals, forshipping and logistics services, for trade of excess inventory, and forspecial geographical areas such as China, India, Singapore, andEurope. And although trading volume is still comparatively small,online transactions are growing rapidly, and these exchanges arealready beginning to link with other online markets—such as auto-motive and aerospace—with which they share a large number ofcustomers.

The retail industry has seen a similar scramble among long-timecompetitors to create consortium-sponsored exchanges. Sears joinedup with France’s Carrefour and five equity partners to set up Global-NetXchange, and were quickly challenged by the WorldWide RetailExchange, made up of 11 other prominent international retail firms,including Safeway, Target, Kmart and CVS from the U.S., Tesco andMarks & Spencers from the U.K., and Casino from France. Over1,000 suppliers have been invited to join in the exchange, andalthough in real terms trade online is still very small, both groupshave announced plans to provide members with services that


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include collaborative planning, supply chain, and logistics services.Similarly, giants such as Georgia Pacific, International Paper, andWeyerhauser have allied to form an exchange that is focused on thepaper industry.

There are also any number of cross-industry alliances develop-ing. DuPont, Cargill and Cenex Harvest are putting togetherRooster.com as a vertical exchange to provide seed and equipment tofarmers and to help them sell their crops online. Even professionalservices companies such as PriceWaterhouseCoopers have launcheda B2B marketplace consortium that provides an exchange for pur-chase of ORM goods and services.

These enormously powerful industry coalitions—and there arealready more than 60—have essentially overwhelmed the onlinemarketplace industry, driving smaller sites out of business and mak-ing viable exchanges pause in their development, waiting to seewhere the intervention of these large market creators will take theirparticular industries.

In many ways, these vertical industry e-markets have an advan-tage over the horizontal or cross-industry trading exchanges, in thatthe sponsors, as both buyers and (if manufacturers) sellers them-selves, will tend to reap a huge benefit from the efficient provision ofsupplies to their industry. Many industry watchers contend that ver-tical industry online exchanges, based on their combination ofindustry knowledge and collaborative organization, don’t even needto make a profit in order for all participants to benefit.

In fact, the threat of future antitrust legislation still looms overthese large consortium electronic markets. The idea of long-timecompetitors sharing not only part-ownership in an enterprise, butalso sharing pricing and supply information, to many sounds offalarm bells in terms of price fixing bias and antitrust dangers.

HORIZONTAL E-MARKETS

Horizontal trading communities, on the other hand, cut across theboundaries of industries and focus on broad categories of goods—office supplies, furniture, travel services, janitorial help—that arecommon to large numbers of cross-industry organizations. Hori-zontal e-markets are often sponsored by e-procurement softwaregroups or leaders in specific areas of these types of indirect goodsand service provision. Horizontal exchanges have, at least in the past,


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been driven primarily by indirect materials and tend to develop inhighly fragmented markets.

W.W. Grainger, the powerful MRO supplies group, provides a

perfect example of the horizontal trading community. Their

exchange, OrderZone.com, went online in May 1999, and provides a

single Web portal that gives customers access to six industry-leading

MRO suppliers. The service includes online ordering and invoicing

and provides customers with a single point of contact for access to a

wide variety of indirect products. Only one registration on this sin-

gle Web site is necessary to gain access to not only Grainger.com and

its MRO catalogs, but to catalogs of other leading indirect suppliers

for items such as office and computer supplies, laboratory equip-

ment, and uniforms.

Some would also contend that companies such as Ariba and

Commerce One are in fact not only software providers, but horizon-

tal exchanges as well, in that they provide a trading community for a

broad spectrum of suppliers of ORM and MRO materials, regardless

of vertical industry. For example, Office Depot has aligned with

Commerce One’s MarketSite to provide an online trading commu-

nity for their ORM goods in the U.S., the U.K., and Japan. Ariba has

purchased SupplierMarket.com, which is an online marketplace for

manufacturing materials. The fact that various vertical industry

exchanges have begun to use their software and exchange networks

means that the lines between vertical and horizontal markets are

blurred even farther.

There are a number of variations on this central theme, but basi-

cally all of these groups—whether known as trading hubs,

exchanges, or e-markets—are focused on creating a global electronic

hub based upon their single, industry-focused portal, which will

provide seamless integration through the entire supply chain, allow-

ing buyers and suppliers of every size and type, and from any coun-

try, to transact all their business through a single electronic

marketplace. Supported by a broad mix of hardware, software, com-

munications, and industry specialist companies, they differ signifi-

cantly—in focus, size, level of service, and market—and range from

enormously powerful collaborations between automakers to tiny e-

marketplace hubs for buying specialty products, such as motorboat

equipment or wine.


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W.W. GRAINGER AND BFGOODRICH

In business since 1927, W.W. Grainger, Inc. has a number of Web properties, but Grainger.com is the granddaddy of them all (in terms of sales as well as time on the Net). In 1999, Grainger had $4.5 billion in sales, with more than $100 million over the Web, the majority of which was placed through Grainger.com.

More than 560,000 brand name maintenance, repair, and operating (MRO) supplies are offered at Grainger.com, with a growing num-ber of Grainger’s 1.5 million cus-tomers actively ordering online. The Web site continues the same kind of customer service and wide range of industrial products pro-vided in the traditional business, with the additional convenience of 24/7 ordering.

This convenience is what first hooked Isaac Pendarvis, assistant buyer for BFGoodrich Aerospace in Pueblo, Colorado. As Pendarvis says, “I’d known about Grainger since I was a kid, so one day I was on the Internet and tried out their site and was hooked. It’s one of the most convenient and easy sites to use.”

Pendarvis makes purchases for the entire BFGoodrich plant of approximately 250 employees. He used to call in orders to suppliers, give the salesperson a part number, and wait until the price could be pulled up. There was also the chance that numbers could be transposed. Now he can place orders online in a matter of minutes, and his display has BFGoodrich’s

pricing built in. Pendarvis claims he can get just about anything he needs from Grainger.com. “They interface with other suppliers,” he says, “so if I need something spe-cific that they don’t normally carry, they’ll research and find the items through their FindMRO.com site, and with their buying power, they can get better prices than I can, so I save money as well as time.”

BFGoodrich has achieved addi-tional savings from the tremendous decrease in paperwork. Individuals in each department now have access to purchasing cards (P-cards), which allow them to do some of their own ordering. “Before, we had to issue purchase orders for every little thing,” says Pendarvis, “but now employees with P-cards and passwords can place orders according to the spending limits that have been set up for their positions.”

Last year, the BFGoodrich Pueblo operation made $100,000 in purchases from Grainger.com, which reflects a 10 to 15 percent savings. BFGoodrich has now signed a companywide enterprise agreement that allows every BFGoodrich facility in the country to order through Grainger.com, with an expected savings of at least 10 percent….

Source: “E-Procurement: Unleashing Cor-porate Purchasing Power,” ©2001 Time Inc., all rights reserved. www.fortune.com/sections/eprocurement2000, retrieved July 19, 2000.


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In fact, a good deal of criticism has been leveled already at someof these exchanges—both large and small—because it is alleged thatthey are simply industry leaders who, although experts in the provi-sion of goods and services to their own markets, understand littleabout technology or the complex interaction of software and newbusiness processes over the Internet. Accordingly, almost every trad-ing hub and exchange is moving toward becoming a consortium of

various ASPs, software vendors, and other third-party support orga-nizations. Many e-marketplaces are in fact now run by ASPs.

All of these types of trading hubs typically make their money bycharging a 1% to 15% fee for each transaction, depending on vol-ume and materials being sold. Even then, the buyer usually comesout well ahead—often saving up to 40% on the price they wouldhave paid through their traditional distribution channels.

3

AUCTIONS

A subset of these online trading communities is the online auction,which provides an online, real-time exchange for commodities in aparticular vertical or horizontal industry—office supplies, autoparts, chemicals—with prospective buyers and sellers logging onand making some type of low-price offer against a request. Thebuyer then makes an online purchase from the vendor who providesan offer that best meets his or her needs. Some sites provide essen-tially a commodity market, with sellers posting their goods andprices and buyers logging on looking for bargains. Others are initi-ated by buyers making their needs known, with suppliers respond-ing—bidding against other suppliers in real-time—to make a bestoffer. These sites can involve participants from all over the world,and most auctions are completed within an allotted amount oftime—say an hour—giving suppliers time to move toward a naturalfloor-level price, and as in all markets, with a flurry of activity to getin before the bell. The result is actually most often a “reverse auc-tion,” where the price goes down, not up, as the bidding progresses.

Many of these e-market auction sites provide the software togenerate the purchase order and exchange invoicing information,and provide at least some level of order tracking and delivery coordi-nation. Others have gone even farther, providing tendering ser-vices—usually in the form of a Request For Tender (RFT)—ratherthan simple commodity auctions. In fact, the better online auctione-markets offer several important services beyond just providing the


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electronic, real-time negotiations between buyer and seller. Theseinclude easy-to-understand classification of RFTs, proactive elec-tronic notification of upcoming auctions by category, calendars andscheduled times for important auctions, and even prequalification oflikely suppliers on behalf of the buyer.

This type of real-time bidding is most appropriate for high-volume, generic, commodity-type goods, where small differences inprice on large volumes add up quickly. As you might expect, online auc-tions are usually focused on indirect goods, although they too arebeginning be seen as providing an instant online spot market for directmaterials—particularly if supplies of those materials are known andpredictable. Some sites, like Free Trade Zone, are a combination of ASPsand e-marketplace, providing not only an online auction service, butalso helping bring vendors that can supply difficult-to-find componentsto manufacturers. This is the type of service that will help e-marketsmove from indirect goods to MRO and direct materials in the future.

The cost of these auctions to participants varies widely. Mostcharge a straightforward fee based upon either transactions or on apercentage of the dollar value of the trade. SupplierMarket.com, forexample, an auction that matches buyers and suppliers for build-to-order manufacturing contracts, charges a transaction fee averaging2% of the total bid.

4

SciQuest, an online exchange for scientific sup-plies, takes a different approach. They began by offering premiumplacement for suppliers on a first come, first served basis. As theybecame more viable, they were then able to charge new suppliers anadditional fee—some 400 vendors have paid from $2,000 to $15,000for advantageous positioning on the site. This is on top of a standardsupplier fee of some 8% to 10% commission per order.

5

There are two key advantages to the online auction: speed andcost reduction.

1.

Speed.

For anyone who has ever had to go through thecumbersome process of sending out or responding toRFPs, the value of the online approach is obvious.Instead of taking several months to receive and evaluatesupplier responses, the entire process can be completedin little more than an hour. Today when companies sendout RFPs, it can take weeks and sometimes months toevaluate all the bids and negotiate the final deal. Becausethe bidders do the negotiating, real-time, online auc-tions can reduce that time to 90 minutes.


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AUCTIONS

Bruce Platzman was intrigued but wary when he first heard about SupplierMarket.com’s Internet mar-ketplace for buyers and sellers of manufactured direct materials. Platzman, CEO of Affordable Interior Systems (QIS), Inc., of Hudson, Mas-sachusetts, a major manufacturer of office systems and workstations, liked the idea of going online to procure direct materials. “It sounded cutting-edge and excit-ing,” he says, “but I also was skep-tical. I always try to balance upside potential against risk.”

No matter how he analyzed it, however, Platzman couldn’t find any risk. The Burlington, Massa-chusetts-based marketplace pro-vider charged no up-front fees for software installation or consulting services, and using the service required no technology beyond an Internet connection and a standard browser.

Platzman’s procurement team pulled together a request for quotes (RFQ) for a year’s supply of three-millimeter banding, the protective plastic molding that fits around the edges of office furniture. They did that using SupplierMarket.com’s forms-based RFQ Builder facility, which guides purchasers step by step through the creation of an RFQ, complete with drawings. At that point, behind the scenes, Sup-plierMarket.com’s SmartMatch technology automatically matched registered qualified suppliers with the RFQ, based on their technical and commercial capabilities. Those suppliers were then invited to par-ticipate in a live online auction.

A couple of weeks later, Platz-man was working in his office and keeping one eye on his computer screen, watching companies place bids for his order. Suddenly the online action had his full attention. Six more suppliers had jumped into the bidding and the price had already dropped below his expec-tations. He called in other members of the company’s management team and they all watched in amazement as the price continued to fall. By the time the bidding was over, a little more than two hours after it had started, Affordable Inte-riors was looking at a low bid of $102,000 for an item that typically cost around $170,000.

Euphoria quickly gave way to doubt. “When you look at a number like that, you have to ask yourself, ‘Who the heck bid this thing? Is it some guy working out of his garage?’ says Platzman. As it turned out, the bidder was no garage operation. It was the pre-mier manufacturer of the required type of plastic edging, a company that regularly supplied Affordable Interior’s largest competitors. “We landed with what we believe is not only the largest, but the highest-quality manufacturer of this prod-uct,” says Platzman, who was so happy with that outcome that he has since posted 12 more RFQs.

Source: “E-Procurement: Unleashing Corporate Purchasing Power,” ©2001 Time Inc., all rights reserved. www.fortune.com/sections/eprocurement2000, retrieved July 19, 2000.


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REVERSE AUCTIONS

Reverse auctions—where suppliers bid prices down to win contracts—are hot in B2B e-commerce. And Web sites where buying organiza-tions can hold such auctions are springing up rapidly.

Since 1997, Quaker Oats has saved $8.5 million by purchasing via reverse online auctions, accord-ing to Carl Curry, vice president of integrated purchasing and logistics. And SmithKline Beecham, a phar-maceutical and consumer health-care company, recently announced $3 million in savings through online auctions.

Both companies chose to con-duct auctions at FreeMarkets Inc. (freemarkets.com). Other Web sites where buyers can hold reverse auctions include SupplierMar-ket.com, BidtheWorld.com, frpMar-ket.com, and eBreviate.com.

Curry says Quaker Oats first heard about online reverse auctions about three years ago when a senior member of his department encountered a FreeMarkets repre-sentative at the Center for Advanced Purchasing Studies in Arizona.

“At that point FreeMarkets was talking about the concept in terms of what they intended to deliver and how their system was going to work,” says Curry. “[Our person] came back excited, saying ‘Boy if this becomes functional we ought to be an early player.’”

From there, Curry and the rest of his department started looking for commodity contracts that were coming up for renewal, which the company could put out for bid on the FreeMarkets Web site. Glycerin was the first product they put out to

bid. Since then the company has held regular auctions on the site, reaping large savings. Curry says the $8.5 million represents the amount of savings the company achieved versus prices it had in place before going to FreeMarkets.

The process for conducting a reverse auction on the FreeMarkets site begins with choosing which contracts will be put out for bid, Curry says. After that, a supplier evaluation process begins where the buying company looks at its list of suppliers to decide which ones will be offered a chance to bid for the contract. At that point, FreeMar-kets also searches its own list for qualified suppliers.

“FreeMarkets typically brings back their list, which may differ somewhat from our own. They may have experience with suppliers with whom we haven’t worked or they may be more global,” says Curry. “We canvas the list of suppli-ers to determine if they can meet our initial needs from a quality and response perspective.”

The next step, Curry says, is to write the RFQ and send it out via email to all qualified suppliers along with information as to when the bidding will take place.

After that, the buying company uses its Web browser to click into the Web site and watch the bid-ding. “The auctions generally take place in about 20 to 30 minutes,” Curry says. “Then we determine who won the bid and award the contract from there.”

Source: “e-Procurement Strategies: Big Buyers Jump on the Net

,” Purchasing Online,

March 23, 2000, pp. 8–9.


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2.

Cost reduction.

Obviously, for buyers, this type ofonline approach helps to cut the administrative costs ofdealing with thousands of small companies. Auctionsalso tend to drive the price of goods down significantly,partly because the nature of real-time spot-buying itselfquickly pushes prices downward, and partly because thecertainty of immediate sale and contract acceptancemeans that the normal mark-up that the seller includesin their prices for covering risk can be eliminated. Forsellers, the online auction greatly expands their potentialcustomer base, allowing vendors an opportunity toquickly and dynamically price and move materials.

There are already many converts. United Technologies, forexample, began an online, in-house auction that it has used since1997 for commodity products—electronic components, motors,wire and plastic parts—which account for nearly 25% of the $14 bil-lion that the company spends each year on these types of indirectand MRO goods.

6

Quaker Oats claims to have saved some $8.5 mil-lion using its own email-based auction system.

SmithKline Beecham, a pharmaceutical and consumer health-care group, recently announced $3 million in savings through onlineauctions. The company has been using the FreeMarkets.com auctionsite since 1999 and has purchased more than $38.2 million worth ofgoods and services online. SmithKline Beecham reports it has cutoverall price of goods by nearly 10%. The FreeMarkets auction sitesays it has facilitated more than $575 million worth of bids for indi-rect goods and services, saving an average of 13% for its Global 1000clients. FreeMarkets deals with some 46 different types of indirectgoods and services, from MRO items to tax preparation services andcar rentals.

7

Although the benefits are obvious, auctions have their draw-backs too. For one thing, at this time at least, they remain primarilyfocused on spot market buying of indirect goods. Although there isno doubt that the process drives prices down and greatly reducesadministrative time and costs, the entire focus also works againstsome of the key principles of procurement. It is difficult to predictprices, for example, as each day may bring a completely different setof bid responses.

More important, and something that has been increasinglyannoying to suppliers, the focus on real-time pricing underminesthe added-value nature that differentiates one supplier from


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another.

Many economists argue that the transparent nature of auc-tions, and the myopic focus on price, essentially eliminates any conceptof competitive advantage.

In fact, because the emphasis of an auctionis on price alone, it makes it difficult for suppliers to maintain anyclose relationship with the buyer, and yet issues concerning collabo-rative part design, quality assurance levels, and delivery dependabil-ity, are often much more important in procurement of MRO ordirect goods, particularly, than price alone.

APPLICATION SERVICE PROVIDERS

ASPs are third-party service organizations that provide hosted appli-cations that service either a one-to-many buyer model or a many-to-many industry trading community. With the advantage of maintain-ing all the software, catalogs, and store files on their own servers,they provide an opportunity for companies—both buyers and sell-ers—to participate in electronic trading communities without hav-ing to buy, install, or maintain their own software. They provideessential e-procurement services, such as catalog content aggrega-tion and maintenance, electronic requisitioning, contract develop-ment, order and delivery management, and electronic payment, andcan process transactions using various forms of EDI, XML, andother communications protocols. All of this is provided for a licensefee, a subscription, or for various forms of usage charges.

ASPs came about in the past few years because, as we have seen,the early e-procurement solutions based on the buyer-managedmodel required significant time, effort, and resources by both buyersand sellers in order to maintain catalogs, systems, and multipleforms of communications protocols. There was a ready market forthird-parties that could provide those services as core competencyand remove that burden from the buyers and sellers, who were moreinterested in the business transaction itself than in maintaining cata-logs or systems support.

Although they have had some success with the largest compa-nies, their appeal, at least in these first formative years, has been par-ticularly to small and mid-sized companies, which had neither theinternal content management and IT resources nor the cash to buy,implement, and maintain complex and expensive e-procurementapplications internally. ASPs provide companies with a cost-effectivemethod for buying into a scaleable solution that they might not nor-mally be able to afford.


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However, when it became obvious that there was a significantmarket for this type of service (see Figure 6.6), others began to moveinto the third-party hosting arena, differentiating themselves byoffering an increasing number of valuable business services toaccompany the basic service of the buyer-seller portal site. Some-times known as Enterprise Asset Management (EAM), not only didthese service providers offer catalog maintenance and basic orderand payment transactions services, but they also now provide vari-ous types of supply chain management, inventory replenishment,directory services and routing, transportation, CRM, order trackingservices, and even fulfillment insurance. Some even provide integra-tion with travel services and 401(k) processing.

A good example of software platforms themselves providingthese services can be seen with Intelisys Electronic Commerce (nowMetiom) and its support of the Autolink.com e-market. Becausemany of the smaller auto suppliers that want to participate have littleIT or content management experience, Intelisys built, and as Metiom,now manages the site, maintaining both the database and server, andproviding catalogs, management tools, and links to other industrysuppliers. A similar service is provided by Essential Markets.com,which offers a hosted service that helps small suppliers to converttheir product information into XML formats, and then places thosesupplier details on the Internet, including links to e-marketplaces.

Similarly, M2MEport.com, which is targeted to small andmedium-sized manufacturers, provides not only an e-market portal,but also a consultative “Collaboration Center,” where their specialistswork with subscribers in the design of customized products. Theyhave even gone so far as to provide a variety of education offerings—

0

20

40

60

80

100 Trade directlybetweenbusinesses

Trade throughexchanges

Figure 6.6 Intermediation: B2B e-commerce, percent of total. (Source: Forrester Research as printed in “Seller Beware,” The Econo-mist, March 4, 2000.)


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including a distance learning program—designed to help manufac-turers with procurement-related issues. Others, like Grainger.com,provide access to important technical support information andmaterial safety data sheets for products sold through their Order-Zone.com site.

Recognizing the potential for ASP outsourcing, and as a furthertwist to this convoluted marketplace, Clarus, Microsoft, and CiscoSystems have agreed to collaborate with a selected group of ASPs toprovide them with hosted services that are designed for use by ASPs,and that incorporate ASP-specific tools that will make it easier forthese ASPs to deliver e-procurement services on an outsourced basisto their customers. This reflects the high level of competition in thismarketplace, and the fact that in order to survive, ASPs have beenforced to seek out multiple revenue streams, including leasing appli-cations and even building portals themselves.

THE FUTURE OF E-MARKETS

In fact, so popular and lucrative has the entire market become thatthere has arisen a number of third-party vendors that specialize inbuilding and operating e-markets, boasting that a basic trading hubcan be set up in three to six weeks for a few hundred thousand dol-lars. This has meant that many people with an entrepreneurial flairand a good working knowledge of a vertical industry supply chainhave been tempted to plunge into the market with their own tradinghub. Venture capitalists, understanding the popularity and thepotential “winner-take-all” scenario for those entering these e-mar-ketplaces, have been only too keen to provide the funding.

There are drawbacks, of course. As with any independent many-to-many portal at this time, both suppliers and buyers still have toupdate their internal systems manually with each transaction.Although obviously the trend is toward full integration, there arecurrently any number of differences—in buying parameters, pay-ment systems, shipping and delivery techniques—that mean thatpurchasing through an e-market is still not much different (at leastin terms of process efficiencies) from negotiating price over the tele-phone. This leaves the “e-market revolution” much less revolution-ary than its proponents claim, in that neither the buyer nor the sellerare fundamentally changing anything about their businesses.

However, many industry watchers and software vendors wouldcounter that it is only a matter of time before that higher level of


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integration is provided by the e-market portal owners. In fact, thisneed has already been partly addressed by a whole new platform ofthird-party integration software known as

connectors

(see “Transla-tion and Connectivity” in Chapter 5).

Many of the early exchanges and auctions that focused on spotmarkets found that they were soon overtaken by larger, better-funded trading communities sponsored by alliances between marketcreators and the large software companies. Moreover, many of thesmaller auction sites have found that contractual details and perfor-mance guarantees, necessary to ensure that buyers won’t get burnedbadly by participating, require software and processes that incorpo-rate a sophisticated and detailed approach to automated bidding—levels of expertise that they do not have and software that very few ofthem can either build themselves or afford to buy.

But of all the controversial issues that this revolutionary shifttoward trading hubs raises, one of the most important is that it runscompletely counter to the prevailing wisdom—that has been gainingmomentum over the past decade—of the value of strategic sourcing.The idea behind strategic sourcing is that a few, preselected, tested,and trusted vendor partnerships are far more cost-effective—because of familiarity with processes and expectations, negotiateddiscounts, and ability to be trusted with secure information—thanmany partnerships with unknown or untested vendors, even if theyare offering one-off low prices for their goods. Dedication to thispremise is, according to many, the very reason why companies wantand need to digitize their procurement systems, in that once theirprocurement specialists are no longer laboring with low-cost, high-volume indirect goods, they can spend their time much more valu-ably in developing closer, tightly-negotiated arrangements with afew highly-trusted partners.

Over the past several years, for example, IBM has significantlyreduced the number of vendors from which they purchase ORMmaterials. In Europe, only 10 suppliers provide the company withsome three-quarters of all of its purchases. But this vendor rational-ization is not as straightforward as it might appear. The ultimatenumber of suppliers may well be what it was before consolidation. Itis simply that IBM has, because of its considerable market leverage,been able to force the costly and cumbersome responsibility fornegotiating and buying from thousands of suppliers down one levelto its selected and trusted “clearinghouse”-type partners. It is a form


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of strategic sourcing, but not one that is easily adopted by smaller,less influential buyers.

On the other hand, many procurement specialists—both buyersand sellers—assert that spot markets, auctions, and many-to-manyexchanges completely undermine the trusted one-to-one relation-ship that is at the heart of the strategic sourcing movement. On thecontrary, at least until these e-market portals can be closely andsecurely integrated with a buying company’s ERP and back-end sys-tems, item price becomes the single most important criteria for trad-ing with a particular vendor, which may be one of thousands ofsuppliers, each one selling on multiple horizontal and vertical indus-try e-markets. It is an unexpected strategic paradox that promises todivide the procurement community.

In the end, of course, it is the very fears expressed by industrywatchers that a single e-marketplace will become dominant (winnertake all) that are part of the motivation for venture capitalists to riskmoney backing a myriad of these e-marketplace startups. So volatileis this portion of the economy that there is some merit in spreadingyour risk.

But there can be little doubt that the vast majority of startupexchanges will rapidly collapse as they are tested in the rough-and-tumble of the day-to-day procurement market.

Customers willincreasingly demand higher levels of service and integrated func-tionality from trading hubs, forcing a form of natural selection totake place in each industry vertical.

Much in the same way, there is also little doubt that customerdemand, legal barriers permitting, will soon force these multiple andcompeting groups—e-procurement software vendors, ERP firms,market creators, auctions, exchanges, ASPs—toward consolidation.Customers are already demonstrating that they don’t want to have todeal with a myriad of different vertical and horizontal suppliers.They want one or two organizations that can provide centralizedsourcing for them. Many research groups contend that the need for asingle, integrated solution for the full e-procurement process—forboth indirect and direct materials and with an acceptable balance ofsystems integration capability and security—will quickly force aconsolidation of the now fragmented e-procurement marketplace.

No longer able to focus on simply providing buyers with pur-chasing leverage and sellers with a broader market, those that sur-vive, claim analysts, are being forced to add value by offering supplychain management expertise, back-end systems integration, inte-


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grated banking, and data security protection, all in a single, cost-effective offering. This will mean that when market forces take theircourse, according to the Gartner Group, there will only be room forabout three vertical portals in each industry. The others will go theway of the e-commerce dotcom startups of the past several years.

There is already evidence that that vertical industry shakeout hasbegun. One good example is EFDEX, the e-market that had hopedto become the dominant exchange in the catering industry, bringingtogether online restaurants and hotels with catering suppliers forfood and drink. At one point, their staff had jumped from 20 to 200,but in the end, investor concerns about cost and the site’s ability toattract the number of users necessary meant that EFDEX failed tosecure the necessary funding to even go live.

Similarly, IndustrialVortex, the industrial automation producte-exchange, collapsed after only six months of trading, despite morethan $20 million in RFQs processed in a single month in the sum-mer of 2000. Neoforma, a highly praised health care exchange, wasforced to lay off 25% of its workforce, its stock price dropping from$60 to $3.50.

8

Most spectacularly, Ventro, which operates many different mar-ketplaces, was forced to close two of its once most promising verticalexchanges. Chemdex, a market site for medical products, and Pro-medix, which provided an exchange for specialty medical products,were both at one time cited as sterling examples of the promise ofvertical markets, but ultimately failed to attract enough participantsor make enough money to survive.

It may well be that if only as a matter of survival, as some argue,e-markets will move quickly to build in the third-party delivery andquality assurance services necessary to reassure buyers. The largerand more progressive trading communities—and this is wherethings become potentially revolutionary—are already providing amarketplace for direct materials, creating a much closer integrationof supply chain systems than could have been contemplated onlytwo years ago. There are many reasons for this, not least that thepotential earnings are so good that the e-procurement and ERP soft-ware groups are scrambling to reshape themselves as partners inthese hubs and exchanges, and are bringing valuable procurementexpertise to add on to the features of the industry focus.

The reason that these types of Internet-based markets are soimportant, then, is that they may well be the catalyst that will push


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e-procurement away from the limited one-to-many extranet model,focused on a single buyer and several preferred vendors, toward amany-to-many arrangement where, even for many direct materials,buyers will go to a single online portal in order to bid on materialsbeing sold on a real-time market.

ENDNOTES

1. Girishankar, Saroja, “New Options Fuel Growth in Online Pro-curement,”

Information Week,

www.informationweek.com, Janu-ary 10, 2000, p. 2–4; “E-Procurement: Unleashing CorporatePurchasing Power,” ©2001 Time Inc., all rights reserved. www.for-tune.com/sections/eprocurement2000, retrieved July 19, 2000.

2. “Commerce One and Covisint Strike Deal,”


December 13, 2000.3. Girishankar, Saroja, “New Options Fuel Growth in Online Pro-

curement,”

Information Week,

www.informationweek.com, Janu-ary 10, 2000, p. 2.

4. Wilder, Clinton, “Industrial Procurement: Online Options Grow,”

Informationweek Online,

October 18, 1999, p. 1.5. Knorr, Dick, “Dawn of the Digital Marketplace,”

Upside Today,

October 26, 1999, p. 6.6. Marsh, Peter, “Virtual Auctions Knock Down Costs,”

The FinancialTimes,

March 11, 1998, p. 18.7. “E-Procurement Strategies: Big Buyers Jump on the Internet,”

Purchasing Online,

March 23, 2000, pp. 8–9.8. Wilson, Tim, “Exchanges on the Edge,”

Internetweek Online,

August 11, 2000, p. 1.


CHAPTER

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CHAPTER

100

7

Standards

The development of new communications standards that

allow buyers and sellers to transmit important purchas-

ing transaction data easily and securely has been a critical

element in the successful development of e-procurement

systems:

�

Because the effectiveness of any e-procurement or integrated order fulfillment system is dependent upon passing purchasing data from system to system, agreement on industry standards for communications has become of paramount importance.

�

XML (Extensible Markup Language) promises to provide a simple and affordable solution for secure exchange of transactional business data between firms.

�

XML standards are being set by various bodies and tend to be different in their development, based upon major industry sectors.


101

s with every move-ment in the infor-

mation technology arenaover the past 45 years, theneed for interoperabilitybetween competing hard-ware and software plat-forms means that agreement on industry standards forcommunications has become of paramount importance.But unlike most media (email, video, etc.) carried over theInternet today, business documents have traditionally lackedagreed standards, particularly with regard to ordering andinvoicing information. It is safe to say that any company thatcan afford to have an EDI link probably already has it. Infact, only 300,000 firms worldwide have ever adopted EDI.Today, most companies have, or will soon implement, someform of ERP system, and it is the need to integrate procure-ment data—item numbers, descriptions, contracts, prices,invoice details—with those back-end systems that makesbroad agreement on industry standards essential.

FROM EDI TO XML

For the past 25 years, Electronic Data Interchange has beenthe only real method for electronic transmission of businessdata between buyers and sellers. As we have already seen,however, although many large companies moved to developEDI connections at least between their major trading part-ners, the combination of high maintenance overhead,expensive leased lines, and cumbersome protocol transla-tions meant that EDI was too complicated and too expen-sive for all but the largest buyers and their key suppliers. Ithas always been prohibitively expensive for small firms—suppliers or buying companies. It is safe to say that any com-pany that can afford to have an EDI link probably alreadyhas it. In fact, only 300,000 firms worldwide have adopted

A It is safe to say that any company that can afford to have an EDI link probably already has it. In fact, only 300,000 firms worldwide have ever adopted EDI.


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EDI, and even retail industries, where fast-moving goods most meritthis sort of electronic exchange of business information, have fewerthan 20% of their suppliers connected.

In 1996, however, a potentially revolutionary business datainterchange standard came to the market with a new ExtensibleMarkup Language (XML), which promised for the first time to pro-vide a simple and affordable solution for secure exchange of transac-tional business data between firms.

XML was everything that EDI was not. Because EDI assumed(correctly) that bandwidth would be extortionately expensive, EDImessages use a compressed and confusing set of codes, and much ofthe explanatory metadata that help programmers to decipher anddebug messages has been left out. These compressed message for-mats not only make EDI transactions expensive and difficult to code,but they are inherent to the code itself, which essentially means itcan’t be fixed. All of this makes EDI programming difficult andexpensive, and EDI programmers often difficult to train and to keep.This is particularly true today, when EDI programmers—with awary eye on XML—are becoming increasingly concerned aboutbeing trapped in an old technology that may become entirely obso-lete in a matter of months.

XML is not a language itself, but a

meta-language standard

thatprovides a flexible and inexpensive way to create common data for-mats. A subset of the Standard Generalized Markup Language(SGML), XML uses plain text to provide

tags

that describe both theformat for the data and the data content itself. These tags can beused to easily identify key pieces of everyday business data—anaddress, a price, or a customer name—and to code for a transfer ofthat data to respective symbols in other applications. This meansthat once XML tags are programmed to recognize and matchagainst another application’s symbols, that application can continu-ously receive transfers of data without having to redefine theselinks. Therefore, if all suppliers use an agreed-upon XML standard,once the interactive format is defined, the in-house system can readelectronic data messages from any supplier using that set of XMLdata tags.

To make things even more sensible, each XML document is self-defining and carries with it a Document Type Definition (DTD) thatprovides an explanation of the data language used in the document. Inthis way, although XML does not affect the way that companies label


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103

or organize their current data, it means that any system that supportsXML can read and understand the data inside the document.

Creating DTDs is not difficult, and unlike Java and other codes,XML is easily learned and manipulated. But although each companycould reformat their current systems to understand various DTDs, aproliferation of various and overlapping DTDs helps no one. Forthat reason, many hundreds of interested companies, including keyIT industry leaders such as Sun Microsystems, IBM, and Microsoftare moving quickly to set industry standards for DTDs that are uni-versally accepted by suppliers and vendors in their industry verticals.For those companies that have significant investments in EDI, thereare a number of translators that will, with varying degrees of effec-tiveness, attempt to transform EDI into an XML format, or to breakout the EDI codes into readable XML symbols, using an EDI parser.

In 1998, the Data Interchange Standards Association (DISA)conceded that XML as a Web-based technology would very likelyreplace the traditional ANSI X12 EDI as the business-to-businessstandard for business data exchange. For buyers, this means thatthey suddenly have potential direct electronic access to secure busi-ness file data transfer from small or specialist suppliers who wouldnever have been able to participate in a program of EDI. For suppli-ers, they now have a relatively simple and inexpensive way to com-municate directly with buyers.

However, as always, the devil is in the details, and there is still notrue agreement on cross-industry standards for protocols at the prod-uct labeling or business transaction levels, and many groups withineach industry are still struggling to come to terms with different varia-tions. For example, if your company is in the financial services arena,it is likely that your agreed XML standards will be based on thoseagreed to by the 6,800 member banks of the SWIFT cooperative(Society for Worldwide Interbank Financial Telecommunications).Electronic component suppliers will use XML data formats agreedto by RosettaNet. Insurance firms will use ACORD standard proto-cols. If as a supplier, you sell horizontal product lines—office sup-plies or travel services—to companies in a variety of industries, youmay need to adhere to standards set by members of the OAGI (OpenApplications Group, Inc.). Exchanges built on Ariba’s software usethe cXML (Commerce XML) protocol, while those using CommerceOne are based on xCBL (XML Common Business Library).


Expert Viewpoint

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XML

Automotive Rentals, Inc. in Mount Laurel, N.J., a global fleet-management company, maintains extensive data on the vehicles under management in multiple systems around the world. But if a customer wanted to see a consolidated report on all of its vehicles worldwide, ARI had a difficult job coming up with the infor-mation. The problem resulted from information buried in multiple database systems, stored under different database schemas.

Realizing how difficult it would be to get every unit in the company to agree on a common database system, the company turned to XML, says Bill Kwelty, manager of cus-tomer services. The company was able to get everybody to agree to a set of common fields, which it defined in XML

as a document type definition file. These fields represent the data customers will likely want.

With agreement on the fields and the distribution of the corresponding set of XML tags, the company, using the Bluestone XML server, is able to generate XML documents in response to customer requests for information. By using XML, the company avoided having to build a data mart or data ware-house and eliminates all the problems associated with updating and synchronizing data marts. “Now everyone has access to the information with-out our having to build and maintain a data warehouse,” Kwelty says. All anybody needs is the ability to parse an XML document.

Source: Alan Radding,“XML: The Lan-guage of Integration,”

InformationWeek Online,

November 1, 1999, p. 4. Used with permission.


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Accordingly, the greatest obstacle remaining is that (as of 2001)there are multiple proposed XML protocol standards under develop-ment through major industry collaborations, and although they allprofess to have the same goal—to develop well-accepted schema, orvocabularies, that will provide standardized and predictable dictio-naries of XML terms, and repositories that will store and help man-age the product descriptions—they are not all necessarily working inharmony. These include:

�

CommerceNet, a business consortium, which is developingeCO Framework X.

�

RosettaNet, a consortium of electronics companies with asupply chain focus, is possibly the most advanced and influentialof the several standards groups, and membership includes pow-erful enterprises such as Federal Express, Cisco, AmericanExpress, and EDS. RosettaNet has not only developed XMLstandards for product catalogs, including a dictionary of 3,600terms describing things such as components, parts, and finishedIT products, but has also devised over 100 XML-based businessprocesses. Its goal is to produce a full supply chain XML stan-dard for the IT industry.

�

Vendors such as Ariba and Commerce One also are definingtheir own XML schema, or industry vocabularies, as they buildtheir online trading communities. Commerce One has created acommon business library (CBL) as part of a government grantfrom the U.S. National Institute for Standards and Technologyand has made its DTD repository available through its Web site.Ariba, too, has put a great amount of energy into supportingcommerce XML (cXML) and into developing its XML Interop-erability Bus Architecture, a framework that will support third-party software integration based on standard XML interfaces.

�

The Open Buying Initiative (OBI) is a standard for Inter-net-based business-to-business purchasing that is sponsored bya group of large buying organizations and their suppliers.Mostly focused on indirect materials, the idea was to provide amechanism for incorporating EDI within OBI objects, but is inreality fairly limited, and few suppliers have moved to adopt thestandard.

�

The BizTalk framework, sponsored by Microsoft, helps toconvert business objects from other applications into XML andis closely linked to another Microsoft creation, the BizTalk.orgWeb site that also acts as a repository for XML schema. Mem-


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bers include Boeing, the Open Applications Group, some of themost influential ERP vendors—Baan, PeopleSoft, and SAP—aswell as Ariba and Commerce One.

�

The Organization for the Advancement of Structured Infor-mation Standards, a nonprofit and vendor-neutral consortium,also has plans for its own repository of XML schema, accessibleon a Web site called XML.cor.

�

The Open Applications Group, Inc.—members includeLucent Technologies, Ford, Microsoft, and IBM—is a nonprofitconsortium focusing on best practices and process-based XMLcontent for e-business and application integration. It is the larg-est publisher of XML-based messages for business softwareinteroperability.

Although there are some who lament the end of EDI and stillfeel more comfortable with the security of the direct and proprietarylink between buyers and sellers, few can doubt that XML is the wayforward. The greater hesitation, for many companies, is to abandonwhat for large companies can be multimillion dollar investments inthese EDI links. Nonetheless, the writing is on the wall.



CHAPTER

Objective

CHAPTER

108

8

Government and E-Procurement

Procurement budgets for local, state, and federal govern-

ments, universities, public agencies, and the military

account for a significant percentage of all the procure-

ment activity in our economy. Adoption of e-procure-

ment methods by these groups will greatly bolster the up-

take of e-procurement among companies in the economy,

and will have a strong influence on the development and

evolution of e-procurement tools and techniques.

�

Government and military purchasing is big business, responsible for sustaining many suppliers worldwide.

�

The government has the ability to move its suppliers toward a more sophisticated, online approach to procurement.

�

Both private firms and government agencies are now developing trade portals and engaging in pilot programs for providing online purchasing.


109

f there is one sector in theeconomy where e-pro-

curement can and will havean enormous effect, it is gov-ernment. Consider the pro-curement costs in the U.S.alone for federal, state, andlocal governments, for themilitary, for state universities,junior colleges, school systems, and veterans’ hospitals. Thefigures are staggering. The combined federal and state gov-ernment procurement costs each year for materials and ser-vices purchased from private firms is estimated to be almost$1 trillion. Federal government spending alone on materialsand services in 2000 was around $550 billion. If it were possi-ble for the federal government, with its vast economy of scaleand massive need for MRO materials, to reduce the cost ofprocurement only 20% (which, as we have seen, is notuncommon with e-procurement initiatives in the private sec-tor), taxpayers could realize annual savings of $110 billion.

1

Similarly, the combined European Union (EU) govern-ment procurement spending was $778 billion in 2000, andgiven the even greater level of participation of govern-ment—in areas such as public transportation, utilities,national airlines and airports, and their nationally spon-sored health care systems—the impact of e-procurementcould be even more profound. That is equally true for Japanand nations of the Pacific Rim, where huge investment innational IT and telecommunications infrastructure make e-procurement initiatives a logical next step.

2

ADVANTAGES WILL NOT BE IN SAVINGS ALONE

Government and military purchasing not only accounts fora huge amount of taxpayer revenue, but it is also big busi-

We should be careful not to underestimate the effect that government endorsement and participation of e-procurement can mean to both the industry and to the economy.

I


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ness, responsible for sustaining an enormous number of suppliersthroughout the world. And although that sort of buying clout in thehands of a single conglomerate might be worrisome, many wouldargue that the benevolent focus of government means that—muchas spending on IT originally revolved around the needs of the mili-tary industrial complex—a strong move toward electronic businessby the federal government could serve to dramatically stimulate andupgrade the economy in the coming years.

We should be careful not to underestimate the effect that gov-ernment endorsement and participation in this area can mean. Inthe same way (but to a much greater extent) that large purchasingconglomerates, such as Covisint and GlobalNetXchange, can forcetheir supplier base to move toward online purchasing and adhere tocertain industry-acceptable standards for communications proto-cols, so the federal government can move its many hundreds ofthousands of suppliers—large and small—toward a more sophisti-cated, online approach to procurement. In adopting business-to-business e-commerce, the federal government can provide an enor-mous incentive for suppliers to become Web-enabled and can stimu-late economic growth in this area. It can thereby provide animportant endorsement for a shift toward the efficiencies andaccountability that comes from procuring online, and encouragemuch broader use of the Internet generally, with all the relateddevelopments in software, business startups, and stock market buoy-ancy that that entails.

Given the advantages of e-procurement, both for governmentagencies and for the economy as a whole, however, government at alllevels in the U.S. has until lately been surprisingly timid in its effortsto move toward online procurement. This is probably in partbecause of the preoccupation with the Y2K concerns that so domi-nated much of the last several years. It is probably also due to a com-bination of the lack of private sector incentives that have beendriving e-procurement among businesses, and the same sort ofchange management problems that tend to plague large, privatefirms. After all, although as citizens we tend to view the governmentas a single entity, those involved with government agencies anddepartments will explain that creating an “enterprise-wide” initiativecan be virtually impossible given the overlapping and often compet-ing power interests.

Certainly, however, there is a growing sense of the need for “e-government” to make government services more efficient, more


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accessible, and easier for the public, and many argue that along withbroader e-government initiatives, such as electronic voting, onlinetax services, and bill payment, e-procurement particularly will bethe impetus to move government into the electronic age. It may wellbe that the original “reengineering the government” effort that wasinitiated with only limited effect nearly 10 years ago was premature,at least in part because the technology—in the form of the Internetand the growing number of software support platforms—simplywasn’t there to allow for a wholesale restructuring.

GOVERNMENT-TO-BUSINESS E-COMMERCE

If there is, however, any one area where the U.S. federal governmenthas begun to take advantage of the power of the Internet for otherthan general information services, it is in the arena of e-procurement.And for anyone who has ever been involved in the complex and time-consuming process used by governments for tendering and purchas-ing, improvements on this front will come as a welcome relief. In fact,the Gartner Group predicts that government-to-business e-commercespending will expand dramatically in the next few years, from its cur-rent $1.5 billion to more than $6 billion by 2005.

3

Much of the credit for this sudden, if limited, appreciation bygovernment of the advantages of online procurement can be attrib-uted to private firms that have been quick to realize the potential forproviding online trading portals and exchange services for the myr-iad number of firms involved in government purchasing. Althoughstill very limited in their functionality, these private/public alliancesare the first step toward developing a broader set of government-based e-procurement services.

One good example is PartnershipAmerica.com, a portal sitedeveloped and launched by Ingram Micro, Inc. that puts private firmsin touch with federal, state, and local government high-technologybuyers. VerticalNet recently purchased GovCon.com, a portal thatprovides suppliers with a number of services, including Bidradar.com,which acts as a search engine and email delivery system for awards andprocurement opportunities issued by the federal government.Bidradar.com also allows potential suppliers to register and qualifyonline, and provides access to sample bids, contracts, and othergovernment forms.

Similarly, Fedmarket.com, designed and administered by WoodRiver Technologies, provides an e-procurement online portal site that


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today focuses mostly on information technology and constructionpurchasing for state and federal government contracts, and includesvendor and buyer directories and ties to government procurement lawdatabases, registration information, a library of forms, and links tofederal assistance centers. The site also provides access to several data-bases that help the potential bidder to search Web pages for opportu-nities and competitive tenders being issued by the government.

Although most of these efforts still remain at an informationallevel only, hints of what is surely to come can be seen with venturessuch as the agreement between Bank of America and NIC Commerceto form a company that will provide state and local governments withan electronic purchasing and payment service for their private sectorsuppliers. This is the first step toward providing transactional servicesonline, including search engines and databases of preferred suppliers,online ordering, and reconciliation and payment services.

The federal government itself has sponsored several importantinitiatives recently that support the underlying structural changesthat will be necessary in order to make online procurement effective.Traditionally, one of the biggest problems facing suppliers hoping tobid on government contracts has been simply learning of opportuni-ties well enough in advance to be able to prepare a well-developedresponse. The Office of Federal Procurement Policy has now put for-ward plans to provide a single, governmentwide portal accessible onthe Internet, which would provide all relevant information on con-tract announcements and awards.

4

Similarly, the Government Con-tracting Group now provides—for a subscription fee of $1,000—areal-time online service that displays new RFPs, procurementannouncements, and bid notices.

5

There are also a number of e-procurement programs being initi-ated at the state level. One promising venture is in Massachusetts,where the state has begun a broad e-procurement program thatinvolves its 154 departments as well as some 350 Massachusettstowns and cities. Using software from Intelisys, a recent pilot pro-gram cut transaction costs by as much as 72%, while reducing thedelivery cycle from weeks to days.

6

Admittedly, none of this compares particularly well with theflurry of e-procurement activity that is occurring in the private sec-tor, but it does give a glimpse of future activities. Possibly moreimportant, the magnitude of government procurement has meantthat e-procurement software vendors such as Ariba and Commerce


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One are now offering services that include government contractingand RFP listings to assist suppliers wishing to sell to the governmentelectronically.

The EU too has struggled with efforts in the e-procurementarena. Burdened with restrictive procurement procedures, layers ofprocesses and approvals, and a much greater number of govern-ment-sponsored tenders (public procurement accounts for 11.5% ofthe EU’s GDP), they have additional issues concerning cross-bordertrade, price differences between countries, and hidden and protectedcontracting that give them a unique incentive to move toward Inter-net-based procurement.

In fact, as with Minitel, France’s precurser to the Internet, theEU first began tentative moves toward a form of electronic procure-ment as far back as 1994, when they established a public procure-ment initiative, the Système d'Information pour les Marchés Publics(Simap), that was based on CD-ROMs and a dial-up database andprovided information concerning public tenders, RFPs, purchasingauthorities, and bid requirements. In time, they migrated that pro-gram to the Internet, introducing search engines for finding ven-dors, opportunities, contracts, and guidance.

There is little doubt that the Simap system—particularly with agrowing number of Internet-based enhancements—is cost effective.While moving the program online has cost an estimated EUR 10million, cancellation of the massive paper version that has been dis-tributed in the past will account for savings of EUR 70 million eachyear. Part of the purpose of the program is to reduce the long waitingperiods involved in public tendering. The paper-based system meantthat purchasing agencies were required to wait for at least 52 daysbetween advertising and awarding a contract. They now estimatethat the process could be reduced to between 10 and 15 days byusing an online system.

As is still too often the case within the EU, the real issue is partic-ipation and compliance, with the majority of public sector contractsstill being awarded (in violation of EU rules) without a public post-ing. Today, despite the growing functionality offered through theInternet system, less than one-third of public sector contracts areactually publicized at all.

7

The one key area of savings that the EU governments have (andthat the U.S. does not, except for Medicare and Medicaid programs,have) that provides an enormous incentive to cut costs and improve


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service is healthcare. As part of national systems, procurement in thehealthcare services is notoriously inefficient. There are more than11,000 hospitals across the EU, accounting for the equivalent ofsome $66 billion in supplies each year. Very few of those hospitalshave the extra funding or the IT skills to invest in any sort of onlinee-procurement system.

As in the U.S., early solutions have sprung up from the private sec-tor. Smartmission, already trading in eight European countries, is anInternet e-market for medical supplies—MRO, food, drugs, utilities,and many other items necessary for the running of a hospital—thatclaims to be able to cut typical purchasing transaction costs for a hos-pital by 60% to 80%. A second exchange, GloMediX, already availablein four European countries, focuses just on medical supplies, but con-tends they will be able to cut the cost of a typical purchase from EUR145 to EUR 5. These types of online exchanges provide the sameadvantages for hospitals as they do for small buyers—collectively, theycan place larger orders and negotiate for better discounts.

8

The government in China, too, has moved into the e-procure-ment arena, with the announcement of China Trade World.com, atrade portal that will help foreign businesses to import goods tomore than 180,000 Chinese manufacturing and production sites.

In order to appreciate the direction in which government e-pro-curement is moving, however, it is helpful to look at Singapore—theself-proclaimed “knowledge island”—where they have already madegreat progress toward a government-wide Internet-based e-procure-ment system. Their broader e-government plan is to provide a singlepoint of contact—a portal known as GeBIZ—that gives all citizensand businesses direct, 24-hour access to a comprehensive and inte-grated government network. Well ahead of most nations in terms ofimplementation, the GeBIZ portal will be part of a much more com-prehensive system of government information and payment ser-vices, through which it will soon be possible to conduct allgovernment-related business—payment of parking fines, utilities,and taxes, for example—online.

Part of that e-government offering is a fast-developing set of e-procurement services that combines many of the elements of bothpublic and private purchasing at a level only now being contem-plated by many trend-leading private firms in the rest of the world.The GeBIZ portal will provide not only an informational forum forgovernment-sponsored tenders and RFPs, but also a broad variety of


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procurement-related services, including allowing suppliers to posttheir product catalogs online, online auctions, and online invoicingand order tracking. Most importantly, there are plans to provide fordirect integration between the payment and financial systems ofgovernment agencies and back-office ERP software (PeopleSoft,SAP, Oracle, etc.) of private firms. Although online purchase trans-actions are currently limited to a maximum of $17,000, once secu-rity issues are overcome, it is likely that up to 80% of all governmentprocurement will be conducted through the GeBIZ portal.

9

Although it is unlikely that either U.S. or EU governments willever contemplate the level of enforced consensus between govern-ment ministries and private organizations that is part of the cultureof Singapore, it is fascinating to see how quickly the unique combi-nation of government funding and cultural cohesion have combinedto drive e-procurement forward so effectively.

THE MILITARY

Defense procurement is another major area of government spend-ing that has enormous potential for cost savings and improved effi-ciencies. Many will remember the colossal row that erupted duringthe mid-1980s concerning inflated prices for the MRO equivalentsof military materials—hundreds of dollars paid for a toilet seat or acoffee pot—and although in fact few of these accusations turnedout to be accurate (most were eventually explained away as anoma-lies in the U.S. Department of Defense’s accounting methodology),the U.S. military, particularly, has since been seen as the epitome ofbad procurement practice.

Despite this unenviable reputation—and the end of the Cold Warand the Peace Dividend, which has meant that procurement budgetswere slashed dramatically since their heyday in the 1980s—the U.S.and the EU nations, particularly, still have massive defense procure-ment needs. The good news is that cooperation between the militaryand Internet-minded private defense contractors is promising to revo-lutionize the Defense Department’s approach to procurement.

This move toward e-procurement is taking several paths. First,major suppliers to the military are moving rapidly toward streamlin-ing their own purchasing through dedicated one-to-many enterprisee-procurement systems. General Electric provides a good example ofthe e-procurement reforms that are beginning to develop among themilitary’s supplier community. GE Aircraft Engines (GE’s aerospace


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division) is the world’s largest manufacturer of aircraft engines. Aspart of GE’s general pledge to quickly move all of its operating unitstoward e-procurement, Aircraft Engines has begun an online initia-tive that will provide portal access to over 400 suppliers of spareparts and maintenance materials. The service will include not onlyonline catalogs, but online tendering, order fulfillment, tracking,payment, and access to technical information.

Similarly, Lockheed Martin’s missile division is using its SAPsystem to provide enterprise ORM and MRO desktop purchasing toemployees. Employees are now able to browse supplier catalogs elec-tronically and to purchase and track delivery of indirect materialsonline. Lower production costs due to the efficiencies gainedthrough these types of e-procurement initiatives by contractorspromise to be passed on, at least in part, to the military.

A second area of intense e-procurement activity is being spon-sored by the U.S. Department of Defense, which began the JointElectric Commerce Program Office in 1988, using mostly EDI tech-nologies, and has gone a long way toward developing paperless pro-curement business practices over the past decade. In 1999, theDefense Department announced a strategy that will encourage elec-tronic procurement throughout the military, and although it stillrequires greater flexibility and functionality in terms of online pay-ment and order fulfillment, it already claims to complete nearly 80%of procurement electronically.

But the area of the most frenetic activity in terms of defense-related online procurement comes with the recent and rapid devel-opment of industry-wide e-markets that provide an online tradingcommunity that is independent of any one company or large con-tractor. As with other e-markets, these trading communities havebeen sponsored, for the most part, by consortiums of interested andinterrelated organizations.

One of the first major initiatives in this area was Exostar, an e-market founded by Boeing, Lockheed Martin, Raytheon, and BAESystems that focuses on indirect materials purchasing for these largecontractors. The amount of materials procured through this onlineexchange is expected to be over $70 billion, which would account forjust less than one-fifth of all defense sector procurement spending.As with most vertical exchanges, several other competing tradingportals have arisen to challenge Exostar. These include MyAircraft


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(founded by Honeywell and United Technologies), AviationX,Tradeair, and Aerospan.

There are many more examples, and each week brings newannouncements—by state and federal departments, universities, andnational health systems—of intentions to participate in auctions orto sponsor or participate in e-markets—all anxious to take advan-tage of online procurement opportunities

. The sheer magnitude oftotal government spending—in the U.S. and in the rest of the world—provides a market opportunity so enticing that software vendors, pri-vate e-markets, and auction sites, are already scrambling to incorporatethe security, contract, and tendering functionality that is required forgovernment bidding.

It is not a market that any vendor would chooseto ignore, and once ignited, may prove to be a powerful incentive toprivate companies, to the e-procurement industry at large, and tothe global economy as a whole.

ENDNOTES

1. “Business-to-Government E-Commerce Procurement: OnlineCenters, Databases, and Tools,”

SolutionCentral Daily Briefing,

September 1, 2000, p. 1; “The Next Revolution,”

The Economist,

www.economist.com, June 24, 2000, p. 3.

2. “The Next Revolution,”

The Economist,

www.economist.com, June24, 2000, p. 3.

3. “Banking Giant Forms Government E-Procurement Company,”

E-Commerce Times,

part of NewsFactor Network (www.NewsFactor.com), July 7, 2000, p. 2.

4. For a full account of e-government projects, see the FCW Webpage at www.fcw.com.

5. “Business-to-Government E-Commerce Procurement: OnlineCenters, Databases, and Tools,”

SolutionCentral Daily Briefing,

September 1, 2000, pp. 6–7.

6. “E-Procurement: Unleashing Corporate Purchasing Power,”©2001 Time Inc., all rights reserved, www.fortune.com/sections/eprocurement2000.

7. Houlder, Vanessa, “Trading Towards a Common Market,” in“Understanding E-Procurement,”


Winter2000, pp. 24–25.

8. “A Spoonful of Sugar,”

The Economist,

www.economist.com, July1, 2000, pp. 1–2.

9. “Island Site,”

The Economist,

www.economist.com, June 24, 2000,p. 2.


CHAPTER

Objective

CHAPTER

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9

The Future of E-Procurement

Understanding the eight key trends in the evolution of e-

procurement can help when devising a company strategy.

�

Development of XML as a standard will greatly improve intersystems connectivity.

�

Industry growth will continue with both corporate and network-based e-procurement solutions.

�

There will remain two different purchasing paths, although the line between them will continue to blur.

�

Consolidation of vertical e-marketplaces.

�

Pressure from customers to provide all-inclusive solutions.

�

Value of strategic sourcing will come in question for spot markets and commodity buying over the Internet.

�

Roles of procurement specialists will change greatly.

�

Government spending e-procurement will increase and influence the uptake of online purchasing solutions among private firms.


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here can be nodoubt, given the

potential cost savings andmarket expansion that e-procurement can bring toboth buyers and sellers,that most companies are ready to begin developing an e-procurement strategy.

But given the volatility and complexity of this fast-evolving marketplace, how can a company know whichapproach to take? Will enterprise applications become com-pletely obsolete, giving way to third-party providers? Willthe benefits of low negotiated price and near-instantaneousbuying mean that most indirect, and even direct, materialswill soon be purchased through e-markets?

There are several things upon which most market ana-lysts would agree.

STANDARDS

The development of XML as a standard, different though itmay still be for various industries, will provide the basis fora completely different and greatly improved level of intersys-tems connectivity. From now on, XML and future deriva-tions of it will mean that even small suppliers can easilytransfer their catalogs, contract terms, and invoices to anybuyer directly, cheaply, and securely via the Internet. Thiswill, in many ways, revolutionize the nature of businessinformation transfer. There is little doubt that these stan-dards will eventually fall into place, so what effect will thisinteroperability have on the e-procurement marketplace?

ENTERPRISE VERSUS E-MARKET MODELS

It is probably safe to bet that, at least in the next five years,neither secure one-to-many enterprise solutions nor third-

T But given the volatility and complexity of this fast-evolving marketplace, how can a company know which approach to take?


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party sponsored electronic trading communities will completelydisappear, nor will they completely dominate the e-procurementmarketplace. Although the early successes of the e-marketplacemade many enthusiasts predict a complete shutdown of the enter-prise-owned, one-to-many model, it seems unlikely that this willhappen. To the contrary, fears concerning reliability, security, andovercoming cultural hesitancy to sever trusted trading relation-ships with individual suppliers have meant that in the U.S.—and toan even greater extent in Europe—senior management has beenhesitant to move toward a strategy where there is exclusive depen-dence on outsourcing firms or on hosted trading communities forpurchasing direct, or even mission-critical, MRO materials.

But, equally powerful arguments can be made in favor of the con-tinued growth and popularity of the e-market trading hubs, particu-larly as auction-type exchanges drive down prices, and marketcreators and ASPs move to provide a more value-added service. Whatis more likely is that there will remain two essentially different types ofofferings—the buyer-sponsored enterprise model and the third-party-sponsored exchange model—and that each of these two areaswill see dramatic changes in terms of focus and consolidation in thecoming months.

DIRECT VERSUS INDIRECT

It is likely that the purchase of indirect and direct goods will continueto require different approaches, with an emphasis on spot marketsand impersonal supplier-buyer relationships becoming the rule forindirect and, to a lesser extent, less complex MRO materials.Although the separate paths traditionally reserved for indirect anddirect materials are blurring in some ways, the fact is that some mate-rials (indirect) lend themselves better to exchanges and catalogs, whileothers, (MRO parts and mission-critical direct materials) have verydifferent characteristics and may need a completely dedicated set ofprocesses, tools, and vendors. Bulk direct materials may profit fromspot-market type buying, but many complex or highly specializedmanufactured components will still require a more personal buyer-seller relationship, even if that process is electronically enhanced.

CONSOLIDATION OF E-MARKET VERTICALS

As we have seen, consolidation within the third-party electronictrading community verticals has already begun. Many buying com-


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panies will want to outsource large pieces of their procurementwork, and suppliers, often from other nations and with limited ITabilities outside of a capacity to log onto the Internet, will be anxiousto use these online markets to sell their goods. But in order to beeffective and to differentiate themselves in an extraordinarily com-petitive marketplace, these electronic trading communities them-selves will face increasing demands to provide buyers and sellerswith a full set of procurement services that essentially underwrite, orguarantee, the success of the transaction.

But, as we have also seen, this is no easy task. The value of thesetrading hubs comes from their ability to engage, in some cases,thousands of suppliers and buyers from around the world. Yet,each of these trading partners will have a requirement for integrat-ing transaction information into their respective ERP systems. Atits most basic, that means that the ASP or exchange host will needto ensure that the transaction between buyer and seller actuallytakes place, and that means that order fulfillment, tracking, pay-ment, and delivery services will need to be provided electronically.If these third parties are to ever move successfully into a directmaterials market, they will also need to provide a much more com-plex group of services associated with automated inventory replen-ishment and logistics services, or at least be able to communicatedigitally and act as an interface between the supply chain and ERPsystems of the sellers and the buyers. In order to support interna-tional sales, this also means supporting different systems for tax,export, language, and currency.

Although many exchange sites abrogate these responsibilities,claiming that they serve only as an open portal for negotiation andsales, these more limited auction-type portals will almost certainlyremain limited to sales of non-mission-critical indirect materials.Moreover, in each vertical market, the unceasing drive among themany auction sites to differentiate themselves will mean that onlythose that provide the most full-function and reliable service willsurvive. The inevitable evolution of these sites is toward fuller func-tionality or extinction.

In short, those that survive will need to offer supply chain manage-ment expertise as opposed to simple purchasing leverage.

These e-mar-kets are increasingly likely—through a combination of partnerships,mergers, acquisitions, and XML interoperability standards—to takeon much of the responsibility for leading practices, insurance, legal,tie-in to payment systems, and even logistics and CRM (see Figure


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9.1). If any of these areas are overlooked, it breaks down the continu-ity of the supply chain. As mentioned earlier, most estimates thesedays set the probable number of survivors for each vertical market atno more than three or four.

Moreover, the influential and financially powerful market cre-ators that are driving many of these new trading communities arecertainly not going to be content with providing e-procurement ser-vices alone. Although their initial focus was to provide an attractiveforum where large companies could contact sellers in order to savemoney and sellers could expand their markets by contacting multi-ple buyers, the strategic aim of these market creators has to be todominate and diversify—to create new revenue streams through thedeeper relationships that this type of commerce community willafford to them. Much like the Sabre Reservation system for Ameri-can Airlines, which still provides the company more revenue thantheir air services, these giant-sponsored trading communities willnot be content to provide online auctions alone, in the future.

SINGLE-SOLUTION SUPPLIERS

Just as the pressures to move toward integrated solutions are forcinga consolidation in the vertical e-market trading communities, it isalso very likely that there will be a move toward consolidation—toprobably three to four major solution providers—for internal, enter-prise e-procurement solutions. Although the enterprise-based soft-ware platforms and the one-to-many model may be the solution ofchoice for direct goods, companies will also like access to e-marketsfor ORM, some MRO materials, and bulk-buy direct goods. Cus-

Translation andIntegration

Security

Electronic Payment

Customer Service

Online GUI Ordering

Decision Support, Reporting,and Management Tools

Order Tracking, Shipping,and Receiving

Vendor Catalogsand Product Data

E-Procurement Software Functionality

Figure 9.1 E-procurement software functionality.


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tomers will not want to have two separate systems, even if the actualapproaches to buying vary greatly. These two paths will merge, ascustomers seek a single system for all purchasing-related activitiesthat will provide access to e-markets and provide a stable platformfor maintaining more traditional one-to-one relationships with spe-cialist vendors. In short, direct and indirect will remain different inapproach, but will become the same in terms of systems delivery.

Fearing encroachment on their early domination of direct pro-curement, and realizing that companies like Ariba and CommerceOne are finding success in Internet-based procurement of indirectgoods, the leading ERP vendors—SAP, PeopleSoft, Baan, Oracle—have all added integrated Web-based procurement modules to theirmanufacturing suites. These ERP vendors have long been involvedwith attempts to automate the procurement process of direct mate-rials for manufacturing firms, and they see the capacity for Web-based procurement as a natural extension of their core competency(see Chapter 5).

In fact, beyond just the integration of direct and indirect procure-ment approaches, the market is crying out for a platform scenario thatprovides all the many pieces for buying and selling digitally—a systemfor both indirect and direct materials, with both enterprise and externale-market focus, that automates the entire purchasing chain, and pro-vides a seamless link between order fulfillment, payment, delivery, andultimately inventory replenishment.

And most companies don’t wantto spend millions of dollars and hundreds of years of man-hoursimplementing and integrating disparate systems. There are usuallyat least 5 potential software platforms that any company can turn tofor e-procurement, and often more than 20. All of this creates a sig-nificant integration challenge, and although Enterprise ApplicationIntegration (EAI) solutions and XML will continue to make inter-system integration more efficient—both inside and outside the com-pany firewall—the advantages of a fully-integrated solution (asopposed to one cobbled together) will continue to be pressedstrongly by buyers.

The problem is that, at present, no vendor is able to provide thatlevel of service. The different histories and natures of ERP, procure-ment, and supply chain systems mean that, though with some effortthey may provide interoperability, it is unlikely in the near term thatone company could provide all of the needed functionality on a sin-gle platform. Part of the problem is simply that companies them-selves seldom have a single, seamless platform internally, having


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stitched together, by necessity, ERP, CRM, e-commerce, supplychain, and e-procurement solutions from different vendors.

As a result, many vendors have been scrambling to expand theirofferings through a combination of internal software developmentand alliances and mergers with related vendors.

One good example is the partnership between Ariba, supply-chain management software vendor i2 Technologies, and IBM, anarrangement announced in early 2000. Ariba’s combined procure-ment platform of both enterprise and e-market services will useIBM’s WebSphere Internet commerce software to integrate procure-ment with i2’s TradeMatrix supply chain software, using Web-Method’s server to direct data between the different platforms. Thisarrangement, they assert, “creates a full, integrated package thatranges from transactions to logistics and payment handling.”

But there are also an entirely new group of more adventurous,all-inclusive third-party providers. These organizations—companieslike INC2inc, Ventro and VerticalNet—are assembling their ownend-to-end suites from various vendors, and may become the pro-prietors of large and powerful independent infrastructure platforms.Most have their origins in vertical industries and, appreciating thefact that much of what they do in terms of providing a procurementplatform can easily be transferred to other horizontal and verticalbuying and selling groups, they are now able to license use of theseintegrated platforms to others. VerticalNet, for example, whichbegan as an informational portal for more than 40 sectors, hasacquired exchange software-maker Tradeum and catalog aggregationmaker Isadora to create an e-marketplace architecture for nearly 60portals, and is hoping to license the package to other customers.Similarly, Ventro, which creates and runs vertical e-marketplaces indiverse areas ranging from healthcare (Broadlane) to plumbing(Industria) and the ill-fated Chemdex (scientific commodities), pro-vides a full ASP outsourcing service for suppliers and buyers thatuses its XML-based middleware product suite (MarketLink) to inte-grate vertical marketplaces with a company’s e-procurement system.

But even these types of unified platforms may have their draw-backs. Critics are quick to explain that “one-stop shopping” is notnecessarily the best answer for every company. Not every allianceresults in the best-of-breed products that a company may want topurchase, and too often these types of alliances leave an uneven levelof functionality among the different parts, with no recourse to


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choosing alternative vendors. These groups suffer from accusationsthat such a “take it or leave it” approach may inhibit a company’sflexibility in the future. Many firms with the capacity to buy andimplement systems in-house prefer to be able to tune systemsaccording to their strengths.

VENDOR RATIONALIZATION

All of this means that the value and need for strategic sourcing hascome under fire. The tendency for trading hubs and the e-market-place is to move to many suppliers instead of to just a few. At issue isthe fact that the whole value of vendor rationalization and strategicsourcing comes from consolidation and leverage of a company’s bestand most trusted suppliers. The basis for successful strategic sourc-ing is therefore to restrict the number of preferred vendors, and yetwith the expansion of e-market portals, the trend is moving in theopposite direction. The logic behind the Internet-based auction is totreat all materials as commodities, driving prices down. That means,generally, the more vendors, the fiercer the competition, and thehigher the likelihood of a lower price for the buyer. In this newworld, vendors are no longer true partners at all.

Most analysts believe that in this type of buying environment,suppliers will increasingly need to show buying companies that thereis merit to a close and personal relationship, and that buyers shouldforgo the low-price auction approach in favor of a service that ismore reliable, or that has other distinct advantages. But in tandemwith the competitive forces of consolidation that are already startingto trim down the number of vertical trading hubs, many analystssuggest that, in fact, indirect e-procurement through these e-mar-kets may follow the same path as the EDI networks did for directgoods over the past 20 years, with the number of vendors decreasingrather than increasing, as trading hubs move to clarify their productofferings and provide distinctive, value added services. After all, it isin the sellers’ best interest to avoid the low-cost race to the bottom.

THE CHANGING ROLE OF PROCUREMENT SPECIALISTS

Probably all of this will be reflected in a changing nature of the roleof procurement specialists. For one thing, systems—ERP, supplychain management APS systems, and in-house e-procurement sys-


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tems—will soon eliminate manual paper, fax, and phone-basedactivities, freeing up many procurement employees. Depending onsize, of course, for companies not involved in direct materials pro-curement, as the entire process becomes automated, the purchasingdepartment may disappear entirely except for a couple of specialistsuper users who deal with systems issues and exceptions. For manu-facturing and distribution companies that deal in direct goods, it ismore likely that purchasing agents will truly become business nego-tiators and specialists, looking for bundled service offerings or otherdifferentiating factors among their suppliers that demonstrate trueadded value.

GOVERNMENT DRIVEN

Finally, although the massive military and government procurementmarkets are lagging behind private industry in moving into e-pro-curement, the combination of public demands for lower cost of gov-ernment, early moves into collaborative online trading communitiesand e-markets by private contractors, and the belief that governmentcan help set standards and move the economy toward the more effi-cient practices of online procurement means that this area will soonsee significant growth.



CHAPTER

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CHAPTER

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10

Assessing the Pros and Cons of E-Procurement

Although there are many strong arguments in favor of

adopting an e-procurement strategy, a successful enter-

prise-wide initiative is not without its challenges:

�

For buyers, e-procurement can mean lower transaction costs, faster ordering, a greater choice of suppliers, and less maverick buying.

�

For sellers, e-procurement can help to expand sales, reduce operating costs, and improve performance.

�

But there are significant difficulties to be addressed in e-procurement projects, including system-to-system integration issues, cost concerns, security issues, new buyer-seller relationships, and a multitude of change management issues.


129

hatever the diffi-culties in develop-

ing a strategy, in predictingmarketplace changes, andin dealing with significantlevels of internal change,when it comes to imple-menting e-procurement initiatives there are still some nota-ble successes. But most organizations have only just begunto examine their e-business strategies, and have a long strug-gle ahead. So what are the pros and cons of the situation?

THE PROS

For Buyers

The pros of e-procurement for buying organizations havealready been discussed, but these are worth looking at again.For ORM and the majority of MRO, whether an enterprisesolution or a subscription to an ASP or a trading portal, allpurchasing can be done by employees from the desktop, sav-ing hours of comparison browsing and misordering. Thisapproach frees up purchasing specialists for work on strategicsourcing, and also provides an easy and effective alternativefor maverick buying. Overall, these desktop requisition sys-tems for indirect goods save time, and through reduced laborcosts, on-contract buying, and best-price purchasing, alsosave money.

E-market exchanges and auctions—again, particularlywithin the context of high-volume, low item-cost indirectgoods—enable companies to quickly and efficiently partici-pate in real-time bidding in a negotiated commerce envi-ronment while realizing cost efficiencies through reducedpurchasing costs, access to dynamic market pricing, reducedsourcing cycle time, lower cost of sales, greater access to new

W It is estimated that nearly 75% of e-business company initiatives (these include e-commerce projects) will fail within the next two years.


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geographic markets. In summary, these e-procurement systemspromise

�

lower transaction costs

�

faster ordering

�

greater choice of suppliers

�

increased efficiency of standardized purchasing processes

�

less maverick buying

�

the ability for buyers to use their intranet to search for andpurchase contract-based and "spot" items from a vast suppliercommunity

�

elimination of much of the inefficient paperwork andunnecessary, repetitive steps involved in procuring complexequipment and services

�

improvement and streamlining of the workflow of operatorsand vendors through features such as online project manage-ment and knowledge management

For Sellers

Internet-based e-procurement has even more benefits for suppliers,because it seldom requires a large investment in order to participate,and particularly with the industry-focused portals, it allows them toexpand their markets, eliminate restrictive, vertical market focus,and many would contend, to compete on merit (that is to say, priceand not relationships). For the majority of suppliers, the advantagesinclude:

�

Expanding sales.

By providing electronic catalogs online,directly to the employees and buyers enterprise-wide, or via thee-hubs and electronic trading communities, suppliers are able togreatly expand their sales volumes. This should help reduce salesprocess costs by nearly 25%. Moreover, suppliers can redefinethe focus of their sales forces toward a more consultative sale,and W.W. Grainger estimates vendors could see incrementalsales gains of 10% to 20% by selling online.

1

�

Reducing operating costs

. Once a supplier’s systems are able totransfer and receive business data directly to and from the buy-ers, the supplier can create orders much more quickly and mini-mize the time and cost of transcription errors so common withpaper-based processes.


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�

Improving performance

. Linking to a customer directly andcollaborating to ensure accurate and on-time delivery providesbetter service and lower overall procurement costs to the cus-tomer, and can result in much more collaborative buyer-sellerrelationships. As a preferred supplier, or if the buyer begins toprovide forecasts of requirements to its vendors, the supplier canbegin to predict and prepare for individual buyer requirementswell ahead of time.

THE CONS

As with all revolutionary ideas, implementing a successful e-pro-curement initiative is dependent upon overcoming several key stra-tegic and tactical obstacles. So far, most companies are not finding iteasy. In fact, it is estimated that nearly 75% of e-business companyinitiatives (these include e-commerce projects) will fail within thenext two years. Curiously, this is not for reasons that we might sus-pect—not because the tools and standards are not yet stable, noreven because the marketplace is unpredictable and volatile. The realproblem is that, at least for direct materials, companies too often failto overcome issues surrounding

�

System-to-system integration, both inside and outside thecompany firewalls

�

Initial investment costs

�

Security, trust, and supplier-buyer relationships

�

Fundamental changes to procurement business processesand company culture

Let’s look at each of these issues.

System-to-System Integration Issues

As we have seen, despite the current level of market hyperbole andthe genuine potential of e-procurement when well integrated, thefact is only a handful of large and progressive companies have beenable to fully integrate their electronic procurement processes andsystems. Most companies, anticipating the cost and effort of inte-grating or replacing legacy systems, and alarmed by the constantlychanging nature of the e-procurement marketplace, have done littleto move forward. Of those that have, few have achieved a satisfactorylevel of systems integration. A recent survey reflects the frustrationof procurement specialists:


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�

Some 40% of the 212 respondents, users of both enterpriseresource planning and dedicated electronic purchasing systems,complained they had to use more than one system to do basicpurchasing and contracting.

�

Another 86% said they wanted a single-entry search enginefor doing comparison shopping, but only 25% have this today.

�

A third of the purchasing managers said they could not easilyplace orders against a master contract, even though 94% saidthey wanted to do so.

2

The problems involved with systems integration, as anyone whohas worked on IT projects can attest, are manifold. How quickly oreasily these systems can be integrated is very much dependent, ofcourse, on the level of interoperability and compatibility. Saroja Gir-ishankar put it well: “Fundamental differences range from serverplatform and programming language to object structures used tocreate applications to the user interface—either a browser or propri-etary piece of software.… If one software suite is written in Javausing Enterprise JavaBeans and runs on a UNIX operating system,and the other suite runs on Windows NT, is written in C++, anduses Active Server pages and the Distributed COM model, integra-tion could be a lengthy process.”

3

The low level of technical sophistication among many suppliersis only one issue, compounded by the general lack of systems com-patibility within the buyer’s own organization. This has tended toundermine the ROI for any e-procurement investment, in that a per-sistent belief continues among procurement specialists that even ifthe buying process itself can be enhanced by online e-markets or acloser one-to-many model, the huge variance in supplier systemsand present poor levels of reliability means that, particularly for mis-sion-critical direct materials purchasing, the traditional telephoneand paper-based invoicing and settlement process would have tocontinue anyway, if only in parallel or as a backup.

The problems are not made easier by the volatility of the mar-ketplace. Broadly, buyers have two choices. The first is to wait untiltheir ERP vendor makes their system more capable of supporting e-procurement over the Internet (which many are doing). However,critics cite concern that ERP companies don’t really have the exper-tise to develop full-function e-procurement systems based on thelatest Web technology, and point to what the market has generallyperceived to be a slow start, if not a failure, on the parts of many ERP


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companies to rise to the challenge of integrating supply chain andAPS systems into their traditional accounting and materials man-agement functionality.

A second option for buying companies is to put their moneybehind one of the major e-procurement suites—such as Ariba orCommerce One—which have quickly moved to provide both enter-prise systems and e-market trading functionality. The hope is that acombination of collaborative alliance activity and third-party XML-based integration offerings will provide the level of interoperabilitywith in-house ERP systems that is needed to justify the cost and toprovide a fully integrated and reliable solution.

Initial Investment Costs

Although few industry analysts would disagree that the benefits, atleast in principle, far outweigh the costs, an e-procurement initiativeof any type comes only with significant up-front investment. Obvi-ously, the price of e-procurement applications varies considerably.According to Gartner Group, Trilogy Software costs about $10,000but Remedy and SupplyWorks average more around $100,000. Atthe higher end, CommerceOne’s MarketSite ranges from $500,000 to$2 million, and Ariba’s systems can range from $1 million to severalmillion dollars.

4

As a rule of thumb, an enterprise with an annualrevenue of at least $1 billion will typically spend $3 to $4 million toimplement e-procurement software, including the systems integra-tion with back-end ERP systems.

5

However, buying and installing the e-procurement application rep-resents a small fraction of the total expense of implementing e-procure-ment. Like most enterprise-wide IT implementations, typically lessvisible costs exceed software purchase fees by 5 or 10 times.

Theseinclude

�

Catalog and content development

�

Consulting fees (system implementation, EAI, processimprovement, change management)

�

Supplier negotiations and assistance

�

Education and training

�

Licensing, maintenance, and other system-related fees

�

System integration

�

Non-production hours spent on the project by in-houseresources


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Appreciating the hesitancy of some companies to come up withthis initial investment, many software providers, including Clarusand Usinternetworking, offer a “zero capital” model in which com-panies essentially rent a system, with very little cost up front, butwith monthly subscription fees covering all hardware, software, andsupport costs.

6

It is possible, of course, to escape some of these costs, thoughnot all of them, simply by subscribing for e-procurement servicesthrough ASPs. There are obvious limitations to an exclusively e-mar-ket-based service, but typically, the e-markets and trading hub feesrun between 1% and 15% of the value of the transaction, dependingon volumes and the types of product being bought and sold. Butalthough Internet portal-based trading hubs and e-marketplacescharge only a subscription, a strong ROI is still almost guaranteed.As previously mentioned, even with these commissions, buyers typi-cally end up saving 10% to 40% on their transactions. With the highlevel of competition for buyers these days, there will almost certainlybe a continuous “race to the bottom” by trading hub sponsors, whowill attempt to gain customers by dropping their transaction costs aslow as possible. Unfortunately, that type of competitive pressure canbring bad consequences for buyers, as well as good ones, since inorder to create profit as competition increases, dotcoms will move toother, less helpful schemes. In fact, as desktop requisitioning hasbecome more widespread, many sell-side Web sites have sought toseduce employees who have recently been given new levels of“empowerment” in purchasing to buy off-contract with them, nego-tiating one-off discounts, and taking advantage of the very systemthat was supposed to eliminate this type of maverick buying.

Security, Trust, and Supplier-Buyer Relationships

All of which brings us back to the issue of security, trust, andhow to manage the supplier-buyer relationship in this new worldof e-procurement.

Security and Encryption Issues

One of the issues most often citedby procurement specialists as a significant concern in shifting to anInternet-based form of procurement is that of security. There aretwo broad areas of concern. First, the Internet itself is, by its nature,inherently insecure. Second, to be effective, an e-procurement initia-tive requires the exchange of often mission-critical (and thereforevery revealing) data between buyers and sellers. For most organiza-


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tions, procurement-related data—financial data, pricing models,strategic plans, expected new product announcements—can easilybe used by competitors to understand company positioning andstrategy. Again, there are two key issues to address. First, what infor-mation is to be shared? Second, with which partners in the supplychain should it be shared?

In many ways, technology is not the issue, however, becausethere are (or soon will be) any number of reliable techniques formaintaining the secrecy of data online. Solutions to technical secu-rity issues are already coming onto the market. In this regard, DigitalCertificate Technology is becoming pivotal to the success of e-pro-curement, because it promises to provide reliable and verifiableidentification of online partners. At the heart of the technology is a

digital signature,

which is based on public key cryptography andmakes the electronic transaction legally admissible. Much like anATM card, which has both a public code and a private PIN, digitalsignatures identify parties through an independent third-party veri-fication group, and the transaction is electronically validated so thatit cannot later be denied. This “undeniability,” or “nonrepudiation,”becomes critical to procurement transactions.

Another good example of fast evolving security solutions is Pub-lic Key Infrastructure (PKI) technology, which is being widelyadopted by the U.S. federal government for use on commercialonline purchasing and smart card transactions. The program,known as ACES (Access Certificates for Electronic Services), issuesdigital certificates in real time and online, so that parties conductingbusiness with the government can be identified while engaged on theInternet. Sponsored by a 29-company consortium, these electroniccertificates provide government procurement officers with a meansof authenticating the identity of the other parties before they beginconfidential discussions. These digital certificates will form the basisof real-time, all-electronic government procurement, where noother signature or authorization is required.

In fact, the government is spearheading many of these efforts.They have another program that is similarly based on digital certifi-cates, but also combines the use of

smart cards—

much like standardprocurement cards, in that they contain a powerful computer chipembedded in the card so that they can store critical data that rangesfrom identification codes to transaction data. This combined tech-nology is already being used by the Department of the Treasury and


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the Department of Defense when exchanging goods internally—often on contracts that are valued at many millions of dollars. Andapart from using smart cards and PKI technology themselves, manystate governments are already debating legislation that will makethese types of “electronic signatures” legally binding. It is only a mat-ter of time before other technologies—fingerprint or retina scantechniques—become the norm.

Still, as a recent survey of European procurement specialistsreveals, a hesitancy to complete sensitive procurement transactionsonline is more often a question of cultural mindset than of practicalencryption techniques.

In fact, in a PriceWaterhouseCoopers surveyof 400 senior business leaders in the UK, Germany, France, and theNetherlands, trust and security issues were named as the two mostimportant factors that were holding back e-procurement progress. Itproves how old habits die hard. Nearly two-thirds of respondentssaid that they sought a “trusted relationship” with vendors beforethey began to deal with them electronically, and nearly as many—60%—preferred dealing with bricks-and-mortar companies overInternet-only suppliers.

Oddly, though, very few of the companies, even those moreadvanced in the use of e-procurement, had implemented the secu-rity systems available to ensure security. The same report con-cluded that almost two-thirds of companies relied only onstandard password protection when dealing with suppliers over theInternet.

7

And, of course, security concerns are not limited to the buyingcompany alone. Transparency of data on inventories, price, andperformance means that suppliers too are feeling exposed. Thistype of honesty and transparency may well undermine a supplier’sability to maneuver, as buyers quickly learn to calculate a vendor’scosts, profit margins, and stock (and therefore, desperation) levels.

In many ways, though, procurement specialists are talking moreabout trust issues than technical security. With more and moreinformation being shared between buyers and sellers, a new level oftrust becomes necessary—one that pointedly may not exist withinthe sterile online e-markets, auctions, and exchanges. ORM is onething, but reliability is everything in purchasing direct materials.Issues of dependability, liability, and security are uppermost in theminds of those procuring direct materials.


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All of this again highlights the need, particularly with the pro-curement of direct goods, for closer buyer-seller relationships thanthose found through e-markets or online exchanges. Today, suppli-ers not only need to be dependable, with reasonable price offerings,but in order to participate in the new world of e-procurement, theyincreasingly are being expected to have the ability to integrate theirtechnical infrastructures closely with the buyer’s technical infra-structure and to be able to change their business processes to adhereto the buyer’s wish for end-to-end automation. They are alsoexpected to absorb a good deal of the liability, through service levelagreements. In the near future, companies will need to move moreand more toward collaborative product design and sharing long-term forecasting with their most trusted suppliers.

Again, all of this leads to a conclusion that, in the short term atleast, it may well be that the electronic auctions and third-party hubs(trading communities) will concentrate on indirect provision, andthe traditional suppliers, made electronically capable, will becomethe new electronic supplier network for direct inventory.

Fundamental Changes to Procurement Business Processes and Company Culture

Of course, an e-procurement initiative is much more than just a system;it is an entirely new way of working and requires dramatic changes tobusiness processes and to ways of thinking and behaving.

In fact, con-sider for a moment the changes that occur when your companymoves from a manual to an electronic procurement environment.These changes include the shift to standardized purchasing con-tracts and methods, and more strenuous, IT-based authorizationsfor purchases. Adoption of an e-procurement system also meansinsisting on the use of that IT system over more familiar fax andphone ordering. There will be greater audit visibility on spending.And, possibly most importantly, the shift from a manual to anelectronic purchasing environment will mean changes to roles andresponsibilities, with the elimination of many administrativeduties, and therefore jobs. Retraining will be necessary so that youare able to take advantage of strategic sourcing opportunities andto redeploy those whose jobs have been eliminated.

Imagine the difficulty of explaining to a company buyer inanother state—or possibly even another country—that he or shecan no longer use their trusted local supplier because the firm hasselected a nationwide vendor instead. And there will be other


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issues. Information Systems (IS) groups will want to be assuredthat even when employees are allowed to make PC purchases underpreapproved technical parameters, IS will still be notified inadvance in order to be prepared to provide setup and help desksupport.

Accordingly, there are two key areas of concern that fall underthe general heading of change management. The first is initiative-related change management, which is necessary in order to makecertain that the project itself is successfully completed. This type ofchange management requires not only strong project management,but also techniques including

�

Assuring that key executives understand the likely risks andbenefits of the project before it is begun

�

Ensuring enterprise-wide sponsorship among key organiza-tional leaders

�

Developing a strong and honest communication plan con-cerning project approach, schedules, and the likely effect that theend result will have on positions and organizational structure

�

Soliciting broad input and participation from different levelsof the organization

Aside from the myriad issues that need to be dealt with in orderto ensure project success, a second focus of broader change manage-ment is necessary. This long-term, company-wide, program ofchange management is necessary to ensure that corporate-wide pur-chasing policies are put in place and are incorporated in new work-ing habits, and also to avoid a backlash or an outbreak of maverickbuying in the future. Unless these changes to business processes andemployee work behavior are specifically dealt with, putting in anautomated system may simply allow for old mistakes to be madereal-time.

WHY E-PROCUREMENT INITIATIVES FAIL

Hard-learned lessons over the past two years have taught companiesthat there are many reasons why e-procurement initiatives ulti-mately fail.

Long-term, company-wide change management is broader inits focus than project success and involves many of the long-termissues that, in the end, result in a successful business transforma-


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tion. These include rethinking business processes, changingreporting structures, retraining and relocating procurement staff,and altering reward and incentive programs. It also means rethink-ing and renegotiating relationships with external partners—sup-pliers or buyers. In this regard, it is important to be realistic aboutwhat areas of procurement can be “reengineered,” at what time, inwhat order, and in what timeframe.

“The notion that a company can transform itself into an e-business by simply using a piece of software and adding it to itsexisting infrastructure is wrong and dangerous,” explains JimShepherd of AMR Research in a recent report. “Companies mustinstead incorporate e-business concepts into their overall businessstrategies. Issues to be aware of include the extension of the enter-prise to trading partners, the transformation of relationships withcustomers and suppliers, radical changes in the order fulfillmentprocess, and the addition or replacement of entire sales channels.These are not decisions for a Web Master or even a CIO alone.”

8

Much of the success of this type of project, then, depends ondeveloping a sound, enterprise-wide e-procurement strategy. Let’snow turn to how to develop that strategy, create a program ofbusiness change, and successfully implement an e-procurementinitiative.

ENDNOTES

1. Brack, Ken, “E-Procurement: The Next Frontier,”

Industrial Distri-bution,

January 1, 2000, p. 2.2. Booker, Ellis, “Enterprise Users Poke Holes in E-Procurement,”

Internetweek Online,

June 4, 1999, pp. 1–2.3. Girishankar, Saroja, “Making It All Work,”

InformationWeek,

Solu-tion Series, June 12, 2000, p. 6. Used with permission.

4. Wilder, Clinton, “Online Procurement Takes Off,”

Information-Week Online,

September 13, 1999, p. 3.5. Reilly, B., “E-Procurement: A Blueprint for Revolution or

Hype?,”

Gartner Advisory, Strategic Analysis Report,

The GartnerGroup, February 9, 2000.

6. Clarus Company Press Release, November 1, 1999.7. Ward, Hazel, “Bosses Voice E-Procurement Fears,”

ComputerWeekly,

July 20, 2000, p. 2.8. Shepherd, Jim, “E-Business: You Can’t Just Add It On or Plug It

In,”

AMR Research Executive Views,

www.amrresearch.com,November 1, 1999, p. 1.


CHAPTER

Objective

CHAPTER

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11

Guiding Principles for Developing an E-Procurement Initiative

We have learned a lot over the past decade about the best

way to implement enterprise-wide initiatives in order to

achieve real business results. Accordingly, there are some

key guiding principles to consider when approaching an

e-procurement initiative:

�

An e-procurement initiative, done well, requires dramatic changes in strategy, organization, process and systems.

�

There is, as there was with ERP initiatives, a tendency to see an e-procurement project as tactical and technical, and not as strategic.

�

It is important that you get early executive involvement and endorsement, that you build a strong case for action, and that you involve all key stakeholders, both within your organization and from the ranks of your suppliers and partners.


141

s we have seen, an e-procurement initia-

tive, done well, requiresdramatic changes in strat-egy, organization, pro-cess, and systems, andaffects functions through-out the organization.Although ORM projectstend to be more straightfor-ward, projects focused onthe direct materials side—which involves rethinkingthe entire order fulfillmentprocess, from customer tosupplier—require significant changes to the way employeeswork and how a company organizes its supply chain andpurchasing processes.

The U.K. government is a good example. In 1999, U.K.officials had set for themselves a target of cutting some £1billion from all government procurement costs over the nextthree years. Having announced their intentions last year ofparticipating in a shopping–mall type of arrangement forORM materials, which required the use of pretendered cata-logs, they have now put a halt to the program, citing fearsthat the combination of poor back-end systems integration,a volatile marketplace, and the need for rethinking their cur-rent paper-based processes means that they are in no posi-tion to move forward with an e-procurement program ofthis scale. For many organizations, this combination of mar-ket volatility and a growing appreciation for the need torestructure their processes before implementing sophisti-cated systems has left them unwilling to commit to a broade-procurement program.

A We have learned a lot about what to do and what not to do to make those enterprise-wide projects a success. The bad news is, implementing companies and consultancies have seldom incorporated this leading-practice project approach, and many, if not most, organizations had a pretty rough time of ERP implementation because they failed to do so.


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The good news in all of this is that e-procurement projects canbe treated in much the same manner in terms of strategy, projectapproach, and change management as the enterprise-wide ERP initi-atives of the last five years. We have learned a lot about what to doand what not to do to make those enterprise-wide projects a success.The bad news is, implementing companies and consultancies haveseldom incorporated this leading-practice project approach, andmany, if not most, organizations had a pretty rough time of ERPimplementation because they failed to do so.

It is worth noting that a majority of businesses still claim thatthey failed to get the business benefits that they had hoped from ERPimplementations. This was seldom because the software platformslacked functionality, but rather because organizations focused onimplementing piecemeal, technical solutions, forgoing the difficultand controversial changes to long-established processes, reportingstructures, and reward systems—and, too often, the organizationsavoided taking on the even more contentious issues associated withworker activities (and often, therefore, positions) eliminatedthrough automation.

Experience has now shown that most projects go wrong (or simplynever really get off the ground) because the organization—and thereforethe supporting consultancy and the software vendor—fails to take intoaccount the fundamentally different nature of a true enterprise-widetransformation project from that of traditional software implementa-tion.

Typically, best intentions and great enthusiasm give way to mul-tiple, overlapping initiatives and broad disagreement over what is inand out of scope, organizational quarrels over which initiativesshould take priority, and frustration and bewilderment of executiveswho think it is all about simply implementing a software solution.

1

GROUND RULES FOR AN E-PROCUREMENT PROJECT

With the upcoming era of e-procurement initiatives, the last thingthe economy or organizations need is a

déjà vu

of those ERP strug-gles. Accordingly, there are certain ground rules that have beenlearned by organizations over the past five years that those involvedin an enterprise-wide initiative should ignore at their own peril.

1. Ensure executive sponsorship and participation.

2. Make your e-procurement project integral to your over-all e-business strategy.


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3. Build a legitimate business case.

4. Set your guiding principles before you initiate theproject.

5. Develop a strong program of change management.

6. Redesign your business processes before selecting software.

Executive Sponsorship and Participation

Because e-procurement will mean many things to many people (andnothing at all to some), it is dangerous to assume that the key leaderswithin your organization fully understand the goals, scope, and casefor action behind the initiative. Lack of clarity around the businesscontext and the failure to understand the strategic importance of ane-procurement initiative can result in a lack of momentum and sup-port from your key organizational leaders.

If the executives themselvesdon’t have a common understanding of the business need and theproject approach, the project from the outset is in danger of degenerat-ing into a battle over funding and resources, languishing, runninglong—or worst of all—resulting in a poorly integrated technical solu-tion that does not take into account process and activity changes.

Thismeans high cost and little business return.

It is still frustrating to see how often, despite the cost and strate-gic nature of these enterprise-wide projects, executives assume thattheir participation in planning, sponsoring, and actively driving theproject forward is unnecessary. As we have learned from other enter-prise-wide initiatives, unless the key organizational leadership (andthis means the Chief Executive Officer, the Chief Operations Officer,the Chief Financial Officer, the Chief Procurement Officer, and thedirector of MIS) are actively involved from the onset of the project—and that means active not only in providing input in the early plan-ning phases, but also continuously adding their support and spon-sorship throughout the project—the tendency will be for the projectto drift toward the strongest interest groups, to erupt in continuousdebate over purpose and ownership, and to overrun in terms of timeand budget.

Unfortunately, despite the almost universal claim by consultan-cies to provide a “full service” offering, very few e-procurement spe-cialist consultants are comfortable working at this executive level—talking directly with the most senior executives in the organizationin terms that are meaningful to executive non-specialists, arguing abusiness case, or developing a broader project that encompasses


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business process restructuring and change management. The realityis that, just as ERP systems were sold to the CIO and APS systems tothe COO, e-procurement vendors and consultants will invariablytarget the manager one level below the director of procurement anddrive the sales program from there.

The problem comes if the e-procurement initiative is seen as tac-tical and technical, and not strategic. It is therefore critical at the ear-liest planning stages of the initiative to provide a forum for all thekey leaders to debate, define, and reach consensus on what it is theyare trying to accomplish with an e-procurement initiative: what theproject will entail, why the initiative is necessary, how it affects othercurrent or planned initiatives, how long it will take, who will beinvolved, how much money it will cost, and what the expectedreturn on investment will be.

Integrate E-Procurement Projectwith E-Business Strategy

It is becoming widely accepted that e-procurement should be seen aspart of a company’s overall e-business strategy, and therefore needsto be planned and managed as a single, company-wide initiative. Yet,it is still not uncommon today to find organizations approachingtheir company’s broader e-business strategy through multiple, oftenconflicting and overlapping initiatives, with each initiative leaderconvinced that his or her project alone—a new Web page, an onlinecentral purchasing package, a decision support system—constitutesthe most important e-business point of focus.

Even if, as will often be the case, the organization’s overall e-busi-ness initiative itself is made up of many smaller but quite legitimateprojects, these efforts need to be prioritized and coordinated.

Web pagedevelopment needs to be planned alongside changes in strategy tothe broader order-fulfillment process. APS systems should be coor-dinated with ERP initiatives and tied into the procurement process.Those responsible for online marketing need to understand theeffect that promises made to customers—in price, availability, orcustomization—will have on manufacturing, procurement, and thesupply chain.

An approach that has usually proven to be successful in the pastis to prioritize these various, interrelated projects, then design andimplement them as a series of pilots within a single, all-encompass-ing e-business strategy. The criteria for prioritization may vary; youmay decide to complete the easiest area first, to concentrate on the


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area where it is most important that you succeed, or to simply focuson the initiative where you can achieve the most benefit.

This same principle holds true even within the confines of the e-procurement initiative itself. Early decisions need to be made on

�

Whether ORM should be the key area of focus

�

Whether you wish to coordinate and integrate MRO withdirect purchasing

�

Whether you can make logical divisions between strategicand tactical commodities

�

When and how you will go about consolidating suppliers

�

What portions of the process should be restructured for“hands-free” efficiency

�

What your new approval policy should be

Whatever the outcome of this prioritization effort, it is crucial thatyou avoid having multiple, uncoordinated, and competing initiatives.

A Legitimate Business Case

Much of the potential for organizational conflict can be reducedsimply by getting early agreement on the likely costs and benefits ofthe e-procurement initiative. For those executives or leaders any-where in the organization who still view procurement as bureau-cratic, tactical, back-office work, making a legitimate business casewill probably be essential to gaining meaningful support.

There are several key areas of cost/benefit that you shouldinvestigate carefully before proposing an e-procurement scenario—and certainly before approaching a software vendor. Not only willthey help you gain sponsorship, but they will be invaluable in help-ing you to make critical decisions about implementation and soft-ware selection.

�

Analyze your purchasing process.

Understand what types ofpurchases you make, breaking down transactions by cost andvolume. Can different materials be divided by their strategic ortactical nature, by their delivery time sensitivity, or by theirimportance to production schedules?

�

Document your transaction costs.

Try to calculate theamount of labor time spent by your purchasing employees onmanual data entry, on filling out requisition forms, retypingpurchase orders, sending faxes, and making confirmation tele-phone calls to suppliers. Understand how this varies between


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purchasing categories (ORM versus MRO) and between sup-plier groups. With direct purchasing, also figure in costs associ-ated with holding excess safety stock. Some companies attemptto calculate lost opportunity costs, when purchasing specialistsend up completing administrative work at the expense of criticalsupplier negotiations concerning discounting or extra-value ser-vices. In short, try to understand what your transaction costsamount to in real dollars.

�

Complete a contract procurement analysis.

Examine yourcurrent purchasing contract process by completing an inventoryon current procurement contracts held by your company withyour various vendors. Look at numbers and types of contracts—travel, marketing, office supplies, MRO—that you have cur-rently. Are they held centrally, or are these contracts made uni-laterally by different departments? Do these contracts conflict orvary widely among vendor groups, materials, or departments?

�

Create an inventory of RFPs.

Carry out a similar analysis onyour current tendering process. Understand if Request for Pro-posals (RFTs and RFIs) vary greatly between departments ormaterials and if they follow similar leading-practice or industrystandards.

�

Create an inventory of vendors.

Try to document what sup-pliers get what percentages of your purchasing budget, and ratethem in terms of how well they have performed historically andby their strengths and weaknesses.

�

Review your current and future payment strategy options.

Are you currently using corporate purchasing cards? If not, whatoptions might you have? If so, can they provide the level of ser-vice that you anticipate for your e-procurement solution?

Those executives focused on the bottom line may quite justifi-ably balk at the idea of the “soft costs” that are thrown around sooften by software vendors and the optimistic side of the businesspress. Thus, savings such as “reduced time spent on purchase orderand invoice reconciliation” or those derived from many differentfunctional areas within the organization may not be accepted at facevalue. Similar skepticism may arise with vague ideas about “shiftingresources to strategic sourcing.” As valid as this might be, it is some-thing still far too subjective to calculate for bottom line costs or sav-ings. Therefore, set the ground rules on all of this up front withexecutives, and decide beforehand if you need to have an objectiveROI in order to justify moving forward. Many veterans of such


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projects warn of the dangers of avoiding the issue of ROI, explainingthat either the organizational leaders accept the need for e-procure-ment intuitively, or you need to design an ROI scheme that takesinto account both hard and soft savings.

Guiding Principles

It is also important to get agreement among your key organizationalleaders on certain guiding principles that will govern the approachand outcome of the e-procurement initiative. Will you be makingchanges to just tactical ORM goods, or will your project includedirect materials? Is outsourcing an option? What sort of levels ofindependence and “empowerment” with purchasing do you hope toachieve? The more concrete and measurable these guidelines are, themore valuable they will be to those working on the project in thefuture.

One critical area of concern that should be dealt with and decidedon by the key organizational leaders is what to do about “displacedstaff”—those in the procurement process whose primary activities willbe eliminated by changes to the process or by implementing a system.

As we learned from ERP implementations, it can be particularly dif-ficult for the purchasing group to lead the effort and yet ask the verypeople who understand the process best to both create an improvedprocess and to eliminate their own jobs at the same instant. Theguiding principles governing how these displaced workers will betreated can make a huge difference when asking for support andsubject matter expertise, and far too many companies do not havethe leadership or presence of mind to make clear policy decisions inthis area. The answer seems to be to develop a clear policy based on astrong business case and a compassionate approach to retrainingand redeployment, communicate it openly to all levels in the organi-zation, and then adhere to it rigorously.

Strong Change Management Program

As we have already seen, e-procurement means significant changesto the way that your organization orders, approves, and receivesproducts. Equally important will be a completely new emphasis, formost companies, on tactical and strategic buying, with a significantchange to roles, responsibilities, and reporting lines for thoseinvolved.

Accordingly, manual work, except on a rare “exception-only”basis, will completely disappear, and so will the jobs of those cur-


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rently doing data entry and reconciliation tasks. As their work shiftsfrom transactional to strategic work, remember that long-time pur-chasing employees may worry (quite rightly) that they do not havethe skills that will allow them to transfer easily into this new strategicworld. After all, it can be quite a transition from paper-based ordermanagement to the more strategic world of analysis and suppliernegotiations and management.

As a procurement officer deep in an e-procurement projectrecently remarked, “I like the supplier savings here, but I don’t planto be one of the transactional savings.”

2

There are many things that you can do to ensure that a strongprogram of change management is in place in order to help ease thetransition for employees and the company as a whole. These includemaking certain that key executives understand and agree on thegoals, approach, and timing of the project, and that the project iscoordinated and managed through a strong, participative projectmanagement office that provides structure, clarity, integration, anddirection. It is also important, as we have said, to make certain thatimplications on changes to process and work activities are formallycaptured through an implications analysis. Finally, and possiblymost important of all, the entire change project must be formallymanaged according to an agreed-upon change transition plan,which includes a comprehensive, executive-led communication planand an employee participation program that ensures enthusiasmand “buy-in” broadly throughout the organization. (All of this is dis-cussed in much greater detail in Chapter 14.)

Redesign Business Processes

Two key principles behind a successful e-procurement initiative arethat it must be enterprise-wide and it must be founded on changesto strategy and process, not simply on technology. Although it hasnow become accepted wisdom, it is worth repeating, because it hasnever been more valid than it is today with enterprise-wide e-pro-curement implementations.

“Automating a mess yields an automated mess,” explains JohnCorini of Deloitte Consulting’s e-business practice. “The net changein these cases is the substitution of an inbox full of paper requisi-tions with an email-box full of electronic requisitions.”

3

Yet, despite all we have learned over the past five years aboutimplementing ERP, far too often e-procurement projects are still


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being sponsored and controlled by technical consultants and MISstaff, and focus more on implementation of technology than onachieving overall business benefits.

In this golden era of marketing, consultancies almost universallyclaim that they provide a full-service e-procurement solution, but inreality, the vast majority of consultancies in this market space have astrong technical bias. But enterprise-wide, e-procurement imple-mentation—including the necessary changes to business pro-cesses—is something very different from catalog management orportal provision. Enterprise-wide process redesign, working withsenior executives to clarify operational strategy, and implementingcomplex change programs, are all services seen as foreign and dan-gerous ground to most consultancies. Uncomfortable dealing withhigh liability and high ambiguity, most consultants (and internalproject employees) quite justifiably prefer the safer ground of well-defined, cleanly scoped projects limited to implementation of soft-ware modules.

Yet, unless those process changes are explicitly identifiedand made with a targeted change program, the functionality and there-fore the value of the software (as far too many companies have discov-ered after poor implementations of ERP systems) will be seriouslylimited.

In keeping with lessons learned that extend back to the basicconcepts of business process reengineering (remember the seminalarticle by Hammer and Champy, “Don’t Automate, Obliterate”),most companies that have been through an e-procurement projectrecommend analyzing the procurement process and fundamentallyremapping how you plan to do the process based upon a paperlessapproach, sometimes known as a

hands-free

model. This means get-ting together with procurement specialists and suppliers andrestructuring the entire purchasing process—first on paper and thenlive—so that there is minimal human intervention, and only on anexceptional basis for items of critical importance or that require spe-cial negotiations or handling. At the heart of this exception-onlyphilosophy are changes to the approvals process, eliminating themultiple financial and technical sign-offs that so often does little toeliminate maverick buying or waste, and usually only slows downthe purchasing process and adds to overall costs. An underlyingprinciple behind electronic procurement is that employees are freeto purchase as necessary within prescribed criteria, and that—as


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long as there is an accurate audit trail for purchases—approvals arenot automated; they are eliminated altogether.

Working through this exercise helps to highlight the advantagesof a fully automated system and can help you to go a long waytoward documenting the likely time savings and cost benefits of ane-procurement initiative. Many find that even if they do not imme-diately move toward a system installation, the hands-free processmapping itself helps them to fundamentally rethink their anti-quated, over-audited approach to procurement. It also provides agood opportunity to take a “first cut” at the implications analysis, sothat you can develop an early sense of the ways in which employeeswill be affected.

OTHER KEY ISSUES TO CONSIDER BEFORE STARTING

Integration Issues

Because of the time, resources, and money associated with the effort,opinion varies as to whether back-end systems integration shouldtake place before or after the initial e-procurement implementation.Some suggest that a company should start by achieving cost savingsand supplier consolidation first.

“There is a need for ERP integration if you are a big companyand you want to pass that purchase order from the ERP system tothe e-procurement system,” contends Mikko Talsi, ICL’s director ofB2B e-commerce. “But the reason for doing e-procurement in thefirst place is for cost savings from supplier consolidation and manag-ing maverick buying.”

“Don’t start by hooking up ERP,” he advises. “Start by using it asan ordering channel; and then move on to considering how you canintegrate it into your back-end system. If you start with a big ERPintegration, you might not see the return on investment, becauseyour company and needs may change before you achieve it.”

4

A contrary school of thought contends that true business effi-ciency only comes from seamless interconnectivity with back-endsystems, and therefore the first phase of an e-procurement projectmay be—particularly for mission-critical direct inventory and sup-ply chain—to create the internal links with the ERP systems. As wehave seen too often, leaving behind the business benefit changes may


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mean they are never achieved, because starting up a new projectafter an exhausting effort can be risky. Whichever strategy is best foryour company, it is important to get agreement early among yourexecutive sponsors, and guidance on project scope should be clearlycaptured in your guiding principles.

Involving Suppliers and Vendors

“Supplier participation is no less critical to the successful implemen-tation of any e-procurement solution,” notes John Corini of DeloitteConsulting. “Without this participation, the software is useless. Fewexperiences are more disheartening than to finally overcome yourown company’s fear of electronic commerce only to run into resis-tance on the supplier side.”

5

One problem is that very often, small or medium-sized vendorssimply have little IT functionality or expertise. Remember that thevast majority of suppliers still typically have little more than anInternet Web page, describing themselves and their basic services orproduct lines. Even large suppliers often do not see this type of IT asa core competency and lack the resources to do sophisticated, time-consuming, and often costly electronic catalog maintenance. E-pro-curement for them may seem to involve enormous investment anddisruption with little visible return.

There are many examples of the dangers of overestimating asupplier’s willingness and ability to make these dramatic leaps ontothe Internet. “We tremendously underestimated the effort involvedin getting catalogs online,” explained one major oil company execu-tive. “Our plan had been to get 40 to 50 implemented within the firstsix months. By the end of that period, all we had gotten online weretwo.”

6

After all, there is no point forcing your valued suppliers to over-commit and ultimately risk under-delivery, simply because expecta-tions were missed or badly communicated at the outset of theproject. Many suppliers express fears of an impersonal e-procure-ment process that strips them of their competitive advantage. And,after all, as the head of one of the largest online trading communitiesrecently confessed, one of the unstated aims of any exchange is to“beat the hell out of suppliers.”

Accordingly, although this will probably not be the case for thelarge ORM distributors, for small or niche materials suppliers it canbe important to involve them in your deliberations from the outset,


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sharing with them the fundamentals of the business case.

For thosesuppliers outside of the spot-market or auction strategy, vendors thatremain as your preferred partners need to appreciate that you are notsimply trying to reduce costs internally at their expense, but are willingto respond to added value or trusted vendor status from them.

Includ-ing these suppliers in early justification and design meetings canhelp, as can a willingness to subsidize them during the transitionwith resources or implementation support. Equally, because youcannot involve all your suppliers in the e-procurement planningprocess, it may be necessary to identify only key supplier partner-ships early on. This again argues the case for completing your pur-chasing and vendor analyses first.

The lesson seems to be clear: Decide who your key suppliersshould be and include them as an integral part of your e-procure-ment project, tying them into clear and attainable milestones andbuilding them directly into your change management plan.

Bringing in Consultants

One of the most important decisions for the steering committee andproject leaders will be deciding what sort of help your organizationwill need from outside partners, and to whom you should turn, andwhen. Because of the enormous cost and disruption of ERP imple-mentations, some larger companies have moved toward using con-sultants only when absolutely necessary—for niche areas such assecurity or XML support and of course for the software implementa-tion itself. Consider, however, the advice and expertise that will benecessary—wherever obtained—for an e-procurement project:

�

Leading-practice procurement strategies

�

Outsourcing versus in-house strategy advice

�

Leading operational-level e-procurement practices

�

Process mapping and redesign

�

Change management

�

Program and project management

�

Financial and payment services support for integration within-house financials, for payment processing, and for third-partyfinancial services support

�

Assessment of and participation in auctions, exchanges, andtrading communities

�

Technical architecture and design


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�

Data management

�

Security

�

Specialist services such as catalog content management andbuyer and supplier systems administration

�

Advisory and help desk support for desktop requisitioning

�

Technical and new business process training

�

Knowledge management, data mining, and decision supportsystems and processes

�

Supply chain management, supplier management, and stra-tegic sourcing

�

Expertise in XML, Extended Application Integration (EAI),and system-to-system integration

�

Business case justification and performance measurement

These types of skills, unfortunately, are not always going to beavailable from within a company’s employee ranks. Some organiza-tions have been able to utilize the internal project management skillsof project leaders and team members who have dedicated the pastseveral years to implementing their ERP systems, but in reality, veryfew companies have the internal expertise, confidence, or capacity toventure into this type of project without the help of consultants.Despite the shortcomings of many consultancies, there are stillsound reasons for turning to outside help.

First of all, of course, there is expertise needed for e-procure-ment software implementation, but also for strategy, procurement,leading practices, business process redesign, project management,legacy systems integration, and change management. In fact, theseareas are just as important as the technical capacity to implement orintegrate. Too often, companies believe that they can use their ownpeople to reengineer processes and implement organizationalchange but although their input is valuable, it is essential to get newideas, and these almost invariably come from benchmarking or les-sons learned brought in by a third-party specialist. It is important tokeep in mind that this type of procurement process and businesstransformation expertise is usually not found in the software vendor,technical support, or IT staff.

The second reason for turning externally for help is simply thetoll of such projects on internal resources. Companies need to keeptheir procurement and IT departments running, and even stronglevels of participation on the core team alone will stretch good


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employees to their limits. Quite apart from the design work itself,these e-procurement projects will require extensive discussions withsuppliers and time-consuming hours spent in content managementand data administration (developing and taking down business poli-cies, supplier profiles, end-user information, and so on).

The third reason for turning to outside support is to take advan-tage of a strong third party’s relative political independence.Although you will often still need to grapple with the “not inventedhere” syndrome, and many company executives will balk at the ideaof consultancies doing more than simply fulfilling basic “staff aug-mentation” services, if you can find a strong management consul-tancy with one or two experienced consultants who will help toadvise and guide the project and the executives in key nontechnicalareas (business change and project management is seldom a concernto the software vendors themselves), they can be well worth the cost.

NEW RESPONSIBILITIES FOR CONSULTANCIES

It is interesting to reflect that only two years ago, many industrywatchers and partners in the large consultancy firms were beginningto wonder where, as an industry, management consulting was going.Lay-offs, particularly in the weakening ERP sector, had alreadybegun. The two key growth areas—complexity and knowledge man-agement—had failed to produce the lengthy and lucrative projectsfound in the quickly evaporating ERP market, and there seemednothing ahead except piecemeal systems upgrade work and minorbusiness process improvement projects to sustain an industrybloated with thousands of young generalists and heads-down tech-nical specialists. Then, to everyone’s relief and to many consultan-cies’ total surprise, e-business in all its forms exploded onto thebusiness scene.

7

The very fact that nearly every consultancy now markets itself as“leading” and “thoroughly experienced” practitioners of e-businessshould be a cause for concern. After all, taken up by the sheer energyof the media blitz surrounding e-business, it is easy to forget thatonly three years ago, the Internet, online sales, e-procurement por-tals, and online trading communities and auctions were totally aliento most consultancies’ experience.

Yet, as nearly every consultancy attempts—through ever-cre-ative marketing—to convince customers that they are uniquely qual-ified to help an organization with creating and implementing an e-


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business strategy and infrastructure, it is important to realize thattransforming an organization from a bricks-and-mortar business toan extended, electronically integrated enterprise is as revolutionaryas the nature of e-business itself, and in many ways far more difficultthan implementing an ERP system. It is certainly more complexthan simply creating a Web page or browser. Of course, the chickensare just now coming home to roost, and at the time of press, theshare prices of the top 15 listed Internet consultancies have droppedas much as 90% since their phenomenal highs during the dotcomcraze. They have laid off, as an industry group, more than 3,000employees, and more are likely to go in the near term. There aremany lessons to be learned (one is, don’t bet your company on feesto be repaid by insolvent dotcom start ups).

In order to help organizations successfully make this transitionto e-procurement, consultancies will need to provide sophisticated,impartial, well-informed advice, and will need to take on new levelsof responsibility for their recommendations. In short, they need todo what they failed to do with ERP. Unfortunately, as many organi-zations are already finding out, despite the fact that nearly every con-sultancy boasts the ability to provide a full-service e-businessoffering, in most cases these consultancies are severely oversellingthemselves.

Moreover, the industry (and in fact the economy as awhole) is woefully short on the specific skills in e-procurement softwareimplementation and large-scale transition change management thatare now necessary in order to help companies make this importanttransition.

The majority have only one or two areas of specialty focusand often a limited capacity to advise on or implement even a basiclevel of business process or organizational change. Unfortunately,the software providers themselves, although they know their prod-ucts well, seldom will enter into the realm of advice at the levelrequired to rethink and optimize an entire procurement process.

In fact, the complexities involved in designing and implement-ing an e-procurement strategy effectively is something for which thevast majority of consultancies simply are not prepared. This is some-thing that every client should think about and economists shouldnote, because the success of individual businesses, and ultimately,the increases in productivity necessary to sustain our current level ofgrowth in the manufacturing area and in the economy as a whole isdependent in no small way upon the ability of consultancies to helporganizations through this challenging transformation.


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Accordingly, there are several basic things that you can do to help

mitigate the risk that comes from overdependency on consultants.

�

Make certain that you do not cede overall responsibility forthe success of the project to any one consultancy. Even if a largeand ambitious consultancy promises to be the “general contrac-tor” for the initiative (often a good idea), there is no substitutefor client-sponsored program management supported by awell-informed and involved executive steering committee. Toooften, after a brief enthusiastic blessing of the project, execu-tives retreat from active participation, leaving a well-inten-tioned but politically less powerful project manager to run withthe project and deal with the many risk and change issues thatwill arise. Invariably problems develop that are beyond theproject manager’s power to resolve, leaving them to try to keepthe issues under wraps or fearfully bringing one-off issues forresolution back to an ill-informed and impatient executivegroup.

�

Many of the most successful projects have thereforeappointed a strong internal program manager, who, as the dep-uty to the CEO, is seen as the person responsible (after the CEO)for the success of the overall initiative. Remember that programmanagement skills (enterprise-wide management of multipleprojects) are often very different from project management skills(focused on the success of one separable segment—a project—of the overall initiative) and require a different personality and adifferent level of political clout. A program manager should beable to garner wide support within the organization and havethe presence to engage other executives on equal terms.

�

Give both technical and business process and change aspectsof the program equal weight by appointing technical and non-technical project managers who report directly to the overallprogram manager. The technical project manager should beresponsible for all MIS-related matters; the nontechnical projectmanager should oversee all business process and change man-agement initiatives. Though it is often valuable to also have out-side consultants with “shadow” positions in these areas, thesetwo key people should be from your own company and shouldbe responsible for resolving inter-consultancy conflicts and fordriving the project forward in a balanced way. They will be theoperational-level managers of the entire program.


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�

Finally, make certain that you come to agreement with theoutside consultants early on as to a plan for integrating theiractivities with those of the many other participants involved.There will be a scramble between any consultants worth theirsalt for control over key aspects of the project. Help them toclearly outline their proposed approach, including activities andnamed resources, before you begin the project. Clarity as to spe-cific roles, responsibilities and deliverables is essential.

The fact is, as promising and revolutionary as e-procurement is,it will mean new challenges to businesses and consultancies alike. Inorder to avoid the pitfalls of the ERP era, consultancies will have totruly provide—rather than just pay lip service to—a full solution, orelse learn to collaborate with other specialty and niche providers.Because e-procurement initiatives by their nature are enterprise-wide and dependent upon critical changes to business processes,consultancies will need to develop the ability to integrate businessprocess and change management into their offerings much moresuccessfully than they have in the past.

Client organizations, for their part, will have to learn to takemore responsibility for the overall success of projects, helping toprovide a collaborative forum for multiple consultants without ced-ing full authority to any single group. Because of the strategic natureof e-business (particularly with direct materials), and because of theinability of most consultancies to provide a full-service offering, it islikely that organizations will find themselves increasingly taking on amuch more active role as program managers and coordinators. This,when combined up front with honesty and clarity from consultan-cies on what services they can and cannot provide, will make a cli-ent’s new-found role as catalyst and consultant manager much easierand more successful.

Finally, don’t forget the lessons of the past and allow your e-business project to once again drift toward a purely technical imple-mentation. One of the unavoidable facts of modern business life isthat business, change management, and technical specialists seldomwork and play well together (even within the same consulting firm,let alone among competing ones). Civil war within your project canbe best avoided by structuring a project approach that retains pro-gram management authority internally and gives equal weight toboth technical implementation and business change.


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After all, neither side—consultants or clients—can afford a

déjàvu

of ERP.

ENDNOTES

1. Neef, Dale, “Consultants Can’t Solve All Your E-Business Prob-lems,”

Handbook of Business Strategy,

(New York: Faulkner & Gray,2000), p. 7.

2. Corini, John, “Integrating e-Procurement and Strategic Sourcing,”

Supply Chain Management Review,

March 2000, p. 7.3. Corini, John, “Integrating e-Procurement and Strategic Sourcing,”


March 2000, p. 4.4. McDonald, Sheila, “Top Story: B2B Hits the Trenches,” Electric-

News.net, April 28, 2000, p. 3.5. Corini, John, “Integrating e-Procurement and Strategic Sourcing,”

Supply Chain Management Review, March 2000, p. 3.6. Corini, John, “Integrating e-Procurement and Strategic Sourcing,”

Supply Chain Management Review, March 2000, p. 4.7. Parts of the text on the following pages is excerpted by permission

from two recent articles: Neef, Dale, “Consultants Can’t Solve AllYour E-Business Problems, Handbook of Business Strategy,” in2001 Handbook of Business Strategy (Thomson Financial Media,2001), pp. 63–72; and Neef, Dale, “Hiring an E-Team,” BusinessStrategy, November/December 2000, pp. 17–21.



CHAPTER

Objective

CHAPTER

160

12

Structuring the Project: Phases of an Enterprise-wide E-Procurement Initiative

The way in which you structure your enterprise-wide e-

procurement initiative will have a profound effect on the

results. There are several key things to be considered:

�

It is important to set your e-procurement initiative within the company’s overall e-strategy.

�

Careful project planning and management, including coordinating the e-procurement initiative with other ongoing company initiatives, is essential.

�

It is important that you integrate an implications analysis that captures changes to business processes, job activities, and personnel policies directly into your implementation project.

�

Use well thought-out criteria when making your system selection.


161

ost companies bynow have had some

experience with large andcomplex IT or businessrestructuring initiatives,and will be familiar withthe basic framework of enterprise-wide projects. However,there are some important aspects of the project approach—involving suppliers, building the business case, developingscoring criteria for software platform selection—that areunique to an e-procurement initiative.

To begin with, let’s review the key phases of an enter-prise-wide e-procurement project, shown in Figure 12.1.

STRATEGY PHASE

Although many companies have established annual retreatsand strategic planning days to help executive teams developtheir marketing strategy (and therefore often mistakenlybelieve that they have already done the “strategic planningstuff”), it is important that before beginning any majorenterprise-wide e-procurement initiative, the key organi-zational leaders convene to discuss and agree on the wayforward. Usually completed in a workshop setting with 10to 12 key organizational leaders attending—who should beall company officers, including the CEO—this forum pro-vides an opportunity for the executive group to becomeeducated on the many aspects of e-procurement; to debateand agree on the case for action; to consider the need forbusiness process restructuring, supplier involvement, andrisk and change management; and to reach consensus onthe basic scope of the project, including cost, resources, andtimescales.

M There are distinct phases of an enterprise-wide project. Each is important, and none of them should be missed.


162

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The strategic alignment workshop (which is described in muchmore detail in Chapter 13) should begin by examining the key issuesfacing your company over the next one to three years, and shouldinclude discussion and agreement on

�

The core competency and focus of the company over thenext few years

�

How your products and services may change during that time

�

Key ways in which you will differentiate your products orservices from those of your competitors

�

Future markets and possible growth, scale, and geographyconsiderations

�

Critical changes occurring in terms of customer support,standards, or expectations of quality

�

Issues concerning procurement of ORM, MRO, and directgoods, including inefficiencies, lack of leverage, maverick buy-ing, and lack of compliance

�

The changing nature of your relationship with vendors andpartners, and how these relationships may be affected by e-pro-curement and strategic sourcing

�

How e-procurement plans might affect the supply chain:purchasing, inventory management, supplier management,logistics, and product design

�

Business systems support architecture requirements (AR, AP,GL, performance tracking, reporting)

�

Coordinating your own, and competing with other ongoing,planned initiatives

�

Prioritization, project risks, and change management issues

�

Project planning, including timescales, resources, andbudgeting

Ultimately, the output from the workshop becomes a foundation-planning document that serves as a “constitution” for your company’se-procurement project.

But the real value of this early strategic planningcomes from providing a forum for discussing and clarifying the scope andgoals of the project, gaining consensus at the executive level on all majorproject issues, and providing those involved—now and in the future—with a clear understanding of why the project is necessary, what you aretrying to achieve, and how you believe it should be done.

Far too often, this type of strategic workshop approach is seen asunnecessary or simply too uncomfortable for the executive team,


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who often have long-running grievances that they fear may erupt intoopen conflict. Probably 8 out of 10 projects instead drop immediatelyto the tactical level, with responsibility for moving straight to soft-ware selection being given to a small team from IT and procurement.This invariably means that the e-procurement project is seen as littlemore than a technology implementation, without the strategic con-text, focus, or direction necessary to ensure a successful outcome.

It is important for project change management that this executivegroup continues to participate in the process as an active steeringcommittee. This will help to keep them informed about—andengaged in—the project. It is also better for them and their employeesif these same organizational leaders are responsible for communica-tion and sponsorship of the project within their sphere of influence.

PROGRAM AND PROJECT PLANNING

Based on the same premise as the need to ensure clarity and consen-sus around the e-procurement initiative, the planning phase dropsthe level of discussion from the strategic to the operational andbegins to develop a detailed program plan for the project. Accord-ingly, the planning phase is usually conducted in a similar workshopsetting—to gain the same level of interactive, multifunction discus-sion and consensus-building—but the attendees are operational-level managers and specialists (from purchasing, finance, MIS, man-ufacturing, etc.) who know the current procurement process well.This is essentially where the specialists will put the “meat on thebones” of the project initiated by the executive alignment workshop.Key steps, which we will examine individually, include:

�

Reviewing the company’s strategic direction, guiding princi-ples, and project goals

�

Reconfirming and developing the case for action

�

Setting target performance measures

�

Exploring the supplier side

�

Examining critical areas of concern and earmarking resources

�

Completing a project readiness assessment and developing aplan of work

Strategic Direction, Guiding Principles, and Project Goals

To begin the session, a review of the results of the executive strategicalignment workshop will help the operational-level managers tounderstand the nature, scope, and need for the project—at least as


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seen by the executive team. One of the most important aspects ofproject success is for everyone involved from the start to know pre-cisely what they are hoping to achieve, and it is well worth the time todebate and agree on what the overall goals of the project are, how suc-cess will be measured, what functional areas are included or excluded,and when the project needs to be completed. As the operational man-agers begin to bring detail to the project, it will be immediately obvi-ous why the executive alignment workshop was necessary. Nothingcan be more frustrating for the planning team or the executives if keyguiding principles and scoping intentions are not clearly defined firstby the executives, and then spelled out in their “constitution.”

The Case for Action

In order to get to the next level of clarity and agreement, the groupwill want to examine their views of the compelling issues that gaverise to the e-procurement project, and to develop a consensus as towhy the organization must change the current way of procuringgoods and why those changes need to occur at this time. A fair levelof skepticism is good, but if not everyone agrees on the need forchange and the goals and scope of the project, it is important thatthose points are made and resolved before the initiative is taken anyfurther. Again, clarity and consensus at the beginning of theseprojects helps to eliminate many of the risks associated with cross-functional, enterprise-wide initiatives that overlap managerial terri-tories and personal domains.

The level of exchange and discussion will be much more detailedthan the sweeping assertions usually made at the executive level, andas each key area of improvement—process efficiencies, leverage, andcompliance—is examined, the team should quickly be able todevelop a plan for verifying the business case.

Target Performance Measures

In order to avoid anecdotal-level discussions and disagreements, theplanning group will need to identify some meaningful indicators ofperformance, which will bring as much objectivity as possible to theproject. These might include

�

Lost discount costs

�

Overall labor costs

�

Time spent in routine ORM requisitioning

�

Time and labor dedicated to working with suppliers

�

Numbers of suppliers


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�

Time spent rekeying data

�

Average approval wait-time

�

Amount and cost of maverick buying

Using these indicators, the next step is to set target performancemeasures for the procurement process that will help to actually mea-sure the success of the initiative. The group will need to think care-fully about these measurements. The measurements must be trueindicators of performance, and the group will want to be certain thatattaining these target levels will actually result in meaningfulimprovements in the overall effectiveness of both the procurementfunction and the organization as a whole. Most likely, the executiveteam has endorsed the project based on a combination of partiallyunderstood statistics, anecdotal information on inefficiencies, or juston intuition. Putting some objective numbers to the business casewill help gain clarity and cement support, and is in itself a revealingexercise in exploring the pros and cons of changing the current pro-cess and gauging the value of a shift toward electronic procurement.

The Supplier Side

Many companies have found that an e-procurement initiative pro-vides a unique opportunity to review their entire relationship withsuppliers. During the planning phase, the group should decide iftheir purchasing activities fall naturally into categories—strategic ortactical, mission-critical or support, vendor-dependent or widelyavailable, and so on. This sort of criteria can be used to help catego-rize the usually disparate supplier base, providing an opportunity tobegin the high-level strategic sourcing exercises that most companieswish to do but never find the time to complete.

It also provides an opportunity to start tentative discussionswith key suppliers, and to assess their level of willingness to supporta shift toward e-procurement. Chances are that many of your suppli-ers are only too willing to support your organization in that change,but may have no clear idea what is expected of them—how to partic-ipate, what changes they will need to make, or how much it will costthem. If your project is limited to ORM and desktop requisitioning,most large wholesale suppliers will already be well prepared to pro-vide electronic catalogs, either directly to you or to your chosen ASP.Many will already have at least rudimentary portal and e-purchasingcapabilities. MRO goods often involve specialist and smaller suppli-ers, and these companies may eventually need to participate actively


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in your design workshops. It is important to first make certain thatkey suppliers have the information and assistance necessary to rampup their efforts on the same timescale as your own, and then makecertain that you don’t begin to develop a software solution thatexcludes key suppliers because it is incompatible with their IT com-petency levels or their ability to restructure themselves in line withyour plans.

Resources and Critical Areas of Concern

During this early planning phase, the group will want to review themajor activities within the full procurement process—indirect ordirect—at a very high level and agree on what resources will beneeded to accurately understand these key activity areas—suppliermanagement, order taking, requisitioning, reconciliation, accountspayable, receiving, inventory management, MIS—and how they willbe affected by a shift to e-procurement. This means enlisting thehelp of some of the most knowledgeable people in the organizationto form a “core team” and earmarking a number of experts to helpon specific issues. Unfortunately, these are normally the same peoplewho keep the organization running on a daily basis, so it is impor-tant to begin to plan early for their participation. That means specif-ically contacting the specialists, their managers, and directors, andgetting their consent and assistance in planning and coordinatingschedules.

Even at this early stage of the project, you are likely to encounterthe first hints of project change management issues, as managersresist handing over resources, and rivals of the specialists beingsought contend that they should be consulted also—or instead of—those chosen for the core team. In fact, selection of core team orworkshop participants sometimes requires significant politicalfinesse. It is the first test of the sponsoring executive’s dedication tothe project, and he or she may need to be asked to intercede in orderto guarantee the necessary resources. Often, it is necessary to createsecondary workshops to inform and include colleagues, and in orderto demonstrate that there is nothing “secret” or exclusive about the e-procurement design process, and that their opinions, too, are valued.

In fact, many companies at this point will also begin planningfor a broad series of employee “input workshops” that, conducted inthe first few weeks of the analysis phase, have a twofold effect. First,these workshops are a good forum for soliciting valuable suggestionson how to improve the process from the employees who are closest


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to, and most knowledgeable about, the work on a day-to-day basis.Second, these workshops serve as a forum for discussion and com-munication of the business case and project goals, and help employ-ees to understand why the project is necessary and why their supportis so valuable.

Employee input workshops require a good deal of timeand effort, but have been shown time and time again on enterprise-wide change projects to be extremely effective in helping to consolidateemployee buy-in.

During the planning phase, these resources need tobe identified and secured, and a full project plan, including calen-dars, needs to be produced.

If the program manager has not yet been selected, she or heshould be appointed (ideally, this should be someone who partici-pated in the executive alignment workshop). It is important not onlythat the program manager is involved in these early formative dis-cussions, but also that she or he now take the lead as the project“champion,” with all the sponsorship and communication responsi-bilities that that role entails. The importance of having a projectchampion can hardly be overstressed. There is nothing more criticalto the success of the initiative than a well-respected and fullyengaged project champion (discussed further in Chapter 14).

Moreover, it is important that, under the direction of the overallprogram manager, department-level process champions be identi-fied as “ambassadors” for communicating and supporting the goalsof the project. A detailed, full-project plan should be developed withclear and consistent messages for the employees generally, and thechampions should work with the nontechnical project manager (seeChapter 14) to create an effective communication plan. It seems a bitcorny, but in fact, enthusiasm is still (next to good project planningand management) the most important tool that a company can usein affecting change in an organization.

Project Readiness Assessment and a Plan of Work

As a final step to the workshops, and as a result of the entire plan-ning phase, a detailed plan of work needs to be agreed on with all therelevant stakeholders, which includes the project plan, timelines,milestones, resource needs, cost estimates, and expected deliver-ables. It is a lot of work, but necessary in order to clearly understandand gain broad agreement on project scope, and to identify and con-firm participation and support from those involved with or affectedby the project.


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ANALYSIS AND DESIGN PHASES

During the analysis and design phases, the project finally shifts fromplanning to doing, and with a well thought-out and endorsedproject plan in hand, the organization can now begin to analyze andredesign the procurement process. There are normally several areasof focus.

Collecting Information to Confirm the Business Case

Apart from the cost/benefit analysis on the current process, remem-ber also that total project costs will be much greater than those asso-ciated with simply purchasing and implementing a system.Consulting, additional software, integration with legacy systems—inother words, total implementation costs—will run normally at levelsfrom 5 to 10 times the cost of the software platform alone. Andalthough ORM and most aspects of MRO may be fairly straightfor-ward in terms of process design, direct procurement will be a majorundertaking, involving changes to nearly every process and systemin your entire supply chain. It is therefore usually worthwhile bench-marking total costs, when possible.

It is important that realistic expectations for total cost are set atthe outset. If price expectations are set too low, executives can suffer“sticker shock” and be tempted to declare victory after phase one,without getting the true business benefits that require a larger andlonger-term investment.

Confirming Supplier Support and Compatibility Levels

As we have seen, it is important to make certain that you design youre-procurement process with present and future supplier needs andcapabilities in mind. This is particularly true if you have not kept upwith a strong program of supplier consolidation and are unaware oftheir strategies or current transition programs. It is important todetermine early on how many of your key suppliers are ready to takethe leap toward electronic connections via the Internet, and to alsoknow how many, if any, are currently developing similar collabora-tions with other buying companies. Do they have EDI at present,and if so, what is their plan for migrating to XML? Many large orspecialist industry suppliers may already be planning to participatein vertical industry e-markets, and therefore may be already wonder-ing how to provide electronic catalogs, either directly or throughthat industry portal.


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Redesigning Business Processes

Redesigning business processes involves many workshops anddetailed process-mapping sessions, and along with a sense of per-spective (and humor), practitioners should be careful to keep severalbroad principles in mind:

�

Use automation, whenever possible, with the view of mini-mizing human intervention (create a hands-off procurementprocess).

�

Shift the responsibility for ORM goods purchasing, when-ever possible, to the users’ desktops.

�

Make the process exception only by rethinking approvalcriteria.

�

If both technical and financial approvals are necessary, makethese happen on parallel and simultaneous paths.

�

Reduce one-off product purchases to a minimum.

�

Introduce data only once, at source, and make that dataavailable to parties that require it simultaneously (suppliers,central purchasing, the employee-buyer, accounts payable, etc.).

�

Reexamine and clearly define all roles and responsibilitiesfrom buyer through supplier.

Completing an Implications Analysis on Changes to Activities and Employee Jobs

One of the most often neglected, but easily completed, portions ofthe project is the implications analysis. This analysis is completed bythe design workgroups, either during initial design or in some casesas late as software implementation, depending on approach. Theimplications analysis simply records the changes between the cur-rent state and the future state of the process, but focuses specificallyon the work activities that will be changed or eliminated. For exam-ple, if the purchase order is no longer typed by hand but done auto-matically by the system, the team captures the fact that those specificmanual production activities will no longer exist. As the team mem-bers work their way through the entire procurement process at activ-ity level, they build up a significant profile of the changes toemployees’ future work activities.

By reducing the process to an activity level and then comparingmanual with system-based approaches, this exercise provides amuch more accurate and detailed understanding of what a companyis trying to achieve with the new system, allowing the design team to


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make detailed system adjustments before implementation, or, alter-natively, helping them to shift the company toward accepting built-in leading practices that are inherent to the software. Equally impor-tant, this approach provides an instant picture of the relative gapbetween the current and future ways that employees will work—nomore faxing, or no more reconciliation of the invoice and the pur-chase order—down to the specific activity that will be eliminated.The steps of the implications analysis include

�

Identifying changes in work (at activity, process, and unitlevel)

�

Understanding what will not be done in the future

�

Noting what changes in order, omission, and so on willrequire major organizational or structural changes (alteredreporting lines, new decision-making responsibilities, etc.)

�

Identifying skill changes necessary for current employees tocomplete the new activities

�

Mapping of the future workforce (at skill level only, not byname) against the current procurement workforce in terms ofwhat is done and who does it

Technical and process teams often worry that noting down spe-cific activities and jobs that will be eliminated because of automa-tion will cause too much political disruption to the project andwithin the company. They rightly appreciate the amount of resis-tance and concern that occurs when it becomes widely known thatspecific positions associated with the procurement process will becombined or eliminated. And yet, as with ERP, unless those activi-ties—and therefore positions—are eliminated, the system’s value isgreatly reduced.

Employees will probably know, or at least suspect, thatthese types of positions are at risk anyway, and it is both unfeasible andunwise (as some consultancies still advocate) to try to make the designteam’s deliberations a secret.

I once was called in to help with a large company project wherethe design team members had sequestered themselves away in sev-eral conference rooms; on the doors, they had hung hand-madesigns depicting skull and crossbones with warnings of “ConfidentialMaterial” and “No Entry.” Within weeks, the employee populationwas rife with rumors of wholesale layoffs and staff cuts, fueled by thetotal lack of a communication plan and the exclusive and clandestineairs of the project teams. After several “tell-us-or-else” demands were


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made to management, the CEO finally agreed to a rather enfeebledeffort to explain that it was only an IT system. Unprepared, the CEOwas trapped into admitting that the aim was, in part, to eliminatelabor. Unable to put forward a convincing business case, afraid topledge openness, and having given no thought to a personnel transi-tion plan, the management team simply pledged that no job changeswould be made, thereby undermining the entire point of a multimil-lion dollar software implementation.

The lesson, then, is that it is important to understand the likelyimplications on process and people as soon as possible, to develop achange transition plan, create project champions to promote the ini-tiative and to communicate openly, and to elicit broad employeeparticipation and input through employee workshops. Above all,employees should understand that they are genuinely responsible forthe success of the e-procurement, and should be encouraged, asmuch as possible, to take “ownership” of that success themselves.

SYSTEM SELECTION PHASE

There are many good books on system selection techniques that canexplain in detail how to develop your software requirements and“scripts” for vendor demonstrations, but it is worth noting thatbecause of the volatile nature of the e-procurement software indus-try and marketplace just now, the scoring criteria for an e-procure-ment project should include several key areas of emphasis: cost,functionality, and integration and interoperability.

Cost

Although Gartner Group, confident of the potential returns of an e-procurement project, contends that an organization should expectan ROI to be justified in two years,

1

it is important to remember thatsuch an ROI needs to be realistic and to include all of the elementsthat account for a total cost of ownership. We have up to this pointfocused on the benefits of the business case, but when devising arealistic ROI for e-procurement initiatives, even for simple ORMprojects, it is important to consider implementation costs thatinclude

�

Integration to your ERP and other back-end systems

�

Both technical and process-focused user training

�

Costs associated with helping suppliers to tie into the system


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Outsourcing through ASPs may always be an option, but thistype of approach has its drawbacks. Limited back-office systemsintegration and a dependency on an organization outside of yourdirect control are both serious issues. There have been innumerablecases of ASPs failing to deliver at agreed service levels, and, particu-larly if your project is focused on mission-critical MRO or directmaterials, you will want to be certain of the cost/benefit ratio of anin-house versus ASP approach. Be certain when developing yourstrategy to consider all “total cost of ownership” variables.

Functionality

Any good e-procurement system will provide the basic catalog,ordering, and payment functionality, but it is important to remem-ber that the success of ORM- and MRO-based requisitioning isdependent upon employees being able to easily complete transac-tions from their desktops. Therefore, ease of use is very important,especially in projects involving nonpurchasing employees. For thepurchasing staff, it is also important that a system provides compre-hensive, easy-to-use decision support and reporting tools.

It is always worthwhile, when preparing for a software vendorshortlist, to create a database of current procurement transactions,complete with paper forms used in the process, and to have the soft-ware vendor incorporate these directly into its solution presentationfor your company. This “day-in-the-life” approach not only helps tocontrast the differences between systems, but also forces the vendorto provide case-specific examples (as opposed to preorchestratedand often sweeping claims made in standard presentations) of howthe software will deal with your organization’s purchasing needs.Remember, too, of course, to make certain that the system can pro-vide the level of data and access security that you need.

Integration and Interoperability

One of the most important criteria for selection, particularly if yourorganization is focusing on reducing the transaction costs (time,labor, errors, etc.) that come from manually rekeying data, is the sys-tem’s ability to fully integrate both inward to your own ERP systemsfor automated approval and payment and outward to those of yoursuppliers. Links to in-house decision support systems will be key foreither direct or indirect projects, and if the project involves directgoods, the system will need to interface directly with supply chain


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systems, as well as CRM systems and any e-commerce order fulfill-ment front end.

IMPLEMENTATION PHASE

As with major construction projects that always run long and overbudget, underestimating implementation time for e-procurementprojects is a chronic problem. One of the most important guidingprinciples to maintain is to always set proper expectations. It is to alarge extent an effective early test of the proposing consultants to seeexactly how they approach the issue. Ask them to help you to under-stand how much time you should allot for implementation, includ-ing system installation and training. Software vendors will oftenwave a dismissive hand and claim that implementation can beaccomplished in as little as two months, but they may well be talkingabout a “slam-in-a-system” approach that will ultimately require agood deal more time, money, and rework to achieve the ROI thatyou are hoping for.

Try to judge how well your proposed supplier or consultantunderstands your business requirements. Do they focus on your spe-cific business area, or do they specialize in certain commoditygroups? Have them load several examples of your current data intothe proposed system—an example PO or invoice—and have themwalk you through a day-in-the-life scenario to see how well theyknow the procurement process and their own system’s functionality.You may be surprised to find out just how inexperienced and unsurethe consultants (who, after all, in this economic climate have proba-bly been rushed through a certifying training course and droppeddirectly onto a project proposal) really are about the functionality oftheir systems.

It is important also to understand whether your proposed soft-ware vendor will implement the system themselves or whether theywill have a VAR (value-added reseller) or service provider do it forthem. If they are proposing a VAR, or for that matter an ASP, under-stand their approach to implementation, their previous record forsimilar implementations, and examine their financial standing.Many VARs, anxious to take advantage of the high margins, arerushing to call themselves ASPs these days, and if you do considerchoosing that route, again, you will want to consider issues such asperformance history, scalability, reliability, and penalty provision forviolation of service level agreements.


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Customer Support

In this same vein, and given the complexity and mission-criticalnature of the software, it is important to understand the availabilityof technical support and the standards for service that the companyhas when resolving more difficult and time-consuming system prob-lems. Consider, for example, the numbers of customers that the ven-dor currently has, its customer support infrastructure, and thenature of its service level agreements, support desk, and issue resolu-tion offerings.

Future Viability of the Group

Finally, try to make a considered judgment on the mid-term viabilityof the software itself. This is not going to be easy to do, given the vol-atility of the marketplace, but try to develop an algorithm that givesvalue to a weighted scoring of key variables, such as

�

Scalability

�

Vision

�

Development plans

�

Vendor’s history of adhering to announcement dates

�

Future integration and/or operability plans

� Major changes to functionality that may make the vendorvulnerable to takeover or other risks

Size, financial strength, market position, and a stable manage-ment structure are all good indicators of future performance, buteven these variables, as we have seen, cannot be guaranteed to giveyou an absolute assurance of future viability. In the end, you may beable to use the exercise only to identify and eliminate potentiallydangerous liaisons with niche-platform providers, and will, like therest of the business community, still be forced to make a decisionbased on functionality, service level histories, and total cost.

ENDNOTE

1. Reilly, B., “E-Procurement: A Blueprint for Revolution or Hype?,”Gartner Advisory, Strategic Analysis Report, The Gartner Group,February 9, 2000, p. 15.


CHAPTER

Objective

CHAPTER

176

13

The Executive E-Procurement Strategy Workshop

There is nothing more important to a successful e-pro-

curement intitiative than executive sponsorship. Com-

pleting an executive strategy workshop can help to ensure

that your organizational leaders understand the key fea-

tures of an e-procurement strategy, and reach an early

consensus on approach, sponsorship responsibilities, and

on the need to take action.

�

The executive e-procurement strategy workshop should be attended by key organizational leaders, including company officers.

�

Use the workshop as an opportunity to educate the group on broad aspects of e-procurement.

�

Get the group to come to a consensus on key areas such as the case for action, guiding principles, project timescales, and who will be the program manager.

�

Capture all resolutions and decisions in real-time in order to create a “constitution” for the project.


177

s we have seen, inorder to avoid the

problems and pitfallsthat so many organiza-tions encounter with e-procurement projects, itis important to take thetime with the executivesto debate and reachagreement on e-procurement in the context of your overallbusiness strategy—what it is, who it affects, why it is impor-tant, and what you should do as an organization to imple-ment it.

As the first and most important step in your changemanagement program, conduct a strategic alignment work-shop with senior executives and important organizationalleaders at the beginning of any major e-procurement initia-tive to get consensus on the scope of the project, the case foraction, the likely approach, and the necessary level ofresources, time, and money.

Even if (especially if) such a gathering is likely to resultin strong opinions being voiced and the project put at riskuntil agreement is reached, it is better to surface and resolvecontentious issues at the beginning of the initiative than tohave to fight those battles six months into the project plan,when there is much less flexibility of action.

The advantages of this type of workshop approach aretwofold. First, it is a unique and logical forum for educatingall the executives to the same level on e-procurementthemes, allowing them an opportunity to thoroughly dis-cuss and come to a consensus on crucial issues concerningthe e-procurement initiative—dealing in a structured waywith key issues, from business justification to projectapproach and staffing. Getting all your key organizationalleaders to the same level of understanding and consensus at

A As the first and most important step in your change management program, conduct a strategic alignment workshop with senior executives and important organizational leaders.


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the beginning of the project is not only the first key step in projectmanagement, but a first crucial step in change management, as well.

Second, the ultimate output of the workshop becomes a founda-tion-planning document—essentially a “constitution”—whichserves as the charter for the entire e-procurement initiative. Thisconstitution is valuable not only in providing critical guidance to theproject team, but also as a communication tool for the rest of theorganization.

The executive e-procurement workshop should be held in acomfortable working area, usually off-site and away from distrac-tions and interruptions, with plenty of whiteboard space and flipcharts available. Your key organization leaders—usually between 10and 12 people in all—should attend, including the Chief Executive,Chief Financial Officer, Director of MIS, Chief Operations Officer,Chief Procurement Officer, and other senior leaders who will be cru-cial to the project’s success. The group should include representa-tives from key areas of the process, including central purchasing,accounting and finance, MIS, sales, and customer service. If yours isa manufacturing or distribution company considering a direct mate-rials project, representatives from your supply chain—forecastingand planning, maintenance purchasing, replenishment, and suppliermanagement—should attend as well.

You will also require an effective, independent facilitator and a“scribe” to take down information real-time on a laptop.

STEP ONE: DEFINING AND AGREEING ON FUNDAMENTALS

Because e-procurement means many things to many people, it isimportant to begin the strategic process by simply debating andcoming to a consensus on the purpose and scope of the project. Afew straightforward questions should be used to warm the group up:

�

Why is this e-procurement project necessary?

�

Why now?

�

What are you hoping to achieve?

�

What must you do to achieve it?

�

How will you know when you have succeeded?

�

What changes will be necessary?

�

What needs to be done to ensure success?


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Answers to those questions, as important as they are, may not beas intuitive as they first appear. It often helps, at the beginning of thestrategic definition process, to examine the

case for action

first.Again, simple questions can prompt a serious discussion:

�

Why does the group believe that your organization shouldchange your procurement process? Are they talking about ORM,MRO, or direct materials?

�

How do you know you must change, and what

benefits

areyou hoping to gain?

– Process efficiencies

– Leverage

– Compliance

�

Do you have any real figures yet on the cost or savingsimplications?

�

Can materials be easily divided into

categories,

such as strate-gic materials, materials that require a close vendor relationship,and commoditized or tactical products that can be bought morereadily through exchanges or auctions?

�

Consider also how quickly you need to make any changes,and inversely, what happens if your organization decides to donothing.

One important question is simply to ask yourselves how, as anexecutive team, you will know when you succeed with an e-procure-ment project. Invariably, this will initiate a discussion about whattypes of

performance indicators

will accurately demonstrate anyimprovements. It is a good time to ask how the procurement processis evaluated today, and how well that process is performing againstcurrent performance measures.

One of the most important discussions should center aroundwhat

guiding principles

will govern the initiative. For example, is theproject about indirect or direct purchasing? Is outsourcing anoption? How does the management team intend to deal with theissue of displaced employees—those workers in the current procure-ment process who deal in manual work that will be eliminated by thesystem? Will they be retrained and relocated? What will your policybe on releasing people? Do you plan to communicate openly andhonestly with the employees? Do you plan to use the opportunity torestructure the entire process, or is this primarily a systems installa-tion project?


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Finally, if this is going to be an enterprise-wide initiative, it isworth thinking at the outset about representation from all the

keystakeholders

in the process. Do you have representatives from

�

Procurement

�

Accounting and finance

�

Logistics, warehousing, and inventory management

�

Manufacturing and production

�

Information technology

�

New product design

�

Key vendors and partners

If not, it is probably worthwhile incorporating them into theproject at the earliest possible moment, in order to avoid their miss-ing out on early and valuable information and consensus building.

STEP TWO: EDUCATION ON E-PROCUREMENT

It is usually worthwhile to get someone from a local university, man-agement consultancy, or IT industry analysis group to give a shortexplanatory lecture on e-procurement to your executive team—itshistory, the key issues, and broad scenarios that have been exploredin this book. It can be particularly important to help them not onlyto understand the strategic nature of e-procurement, but also tounderstand the broad trends and rapid uptake of e-procurementsolutions within the economy as a whole. This education session alsotends to help broaden the procurement picture, placing the processmuch more in a strategic, rather than tactical, light.

STEP THREE: REVIEWING THE BUSINESS VISION

Before committing to an enterprise-wide e-procurement initiative, itis often worthwhile to consider first the way in which you anticipateyour organization is moving strategically during the next one tothree years. Depending on what business you are in, for example,you may be able to foresee dramatic changes to how you produce orsell your products or services. Those products and services them-selves may be changing significantly. Will you be moving towardmore online order fulfillment? Do you anticipate levels of growth ornew geographical territories that might mean making greaterdemands of your suppliers or else shifting toward others? Are you in


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an industry that has begun to participate in vertical e-trading com-munities, which may force you to do the same?

Alternatively, ask yourself if there will be

changes in customerdemands and expectations

in the next few years that would, in turn,change the way that you do business with your key suppliers. Forexample, will moving online mean a shift toward providing yourcustomers with the possibility of customization or order tracking,which would, in turn, require a much tighter integration with thesystems of your suppliers?

Are your

key suppliers beginning to change their expectations ofyou

in light of the e-procurement revolution? Many vendor groupsare consolidating or collaborating in developing electronic tradingcommunities, and may be trying to differentiate themselves signif-icantly by changing their entire service offerings—focusing onmanaging a customer’s inventory much more closely, monitoringand automatically refilling certain material groups, or overallbecoming a much closer partner with their buyers. Will theyexpect you, as a client, to be moving toward electronic procure-ment capabilities?

It is sometimes worthwhile understanding, either through

benchmarking

or through a formal leading-practice study, whatyour competitors are planning on doing in these areas. You maywell find that there are new opportunities in vertical exchanges orauctions that could provide significant benefit in purchasing high-volume materials. Often, if prearranged, a high-level benchmark-ing analysis can be provided during the education segment of theworkshop to provide relevant industry-wide examples of costs andbenefits.

STEP FOUR: UNDERSTAND THE PROCUREMENT BUSINESS CASE

Having already learned a little about e-procurement, it is helpful tohave the executive team examine the procurement process end-to-end. For many executives—even in manufacturing—this may be thefirst time they have had the opportunity to discuss or understandefficiency and workflow problems; compliance issues; transactioncosts; failures to adequately exert leverage; the amount of time spentby purchasing personnel in administrative, low-value work; strategicsourcing policies; and other issues. Typical questions might be


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�

What are the general purchasing rules?

�

Are they consistent or do they vary widely betweendepartments?

�

Are they understood and adhered to by everyone?

Chances are, the answers to these types of questions will high-light the huge amount of potential savings to be made simply fromfocusing on applying leading practices (whether electronic or not) tothe procurement process. These are the types of discussions that willopen an executive’s eyes to the potential value of an e-procurementinitiative.

For ORM and MRO purchasing, also consider issues such as

�

The amount of manual work, data redundancy, and rekeyingthat takes place daily

�

Examples of long waits for approval and of high rates ofchecking and control (multiple stop, wait, approval points)

�

Returns

�

Extensive information exchange

�

Maverick and off-contract buying

�

Lack of strategic sourcing and discount leveraging

For direct materials purchasing, consider

�

Costs of safety stock and excessive inventory buffers

�

Interruptions on manufacturing/shop floor due to lack ofmaintenance or direct materials (MRO)

�

Returns or no shows

�

Failures to adhere to pricing policies and negotiated discounts

�

Frustrations with your inability to develop a consistent andenforceable plan for strategic sourcing

Consider how major changes in the procurement process willaffect the organization. Review the

current information technologysystems

and consider how they would interface with an e-procure-ment system.

�

Are there separate systems for accounting, requisitioning,receiving, central purchasing, and payment?

�

Are there disparate systems used in different departments?


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�

What are your current capabilities with regard to EDI andXML?

�

Do all employees who might need to make purchases haveaccess to a computer?

Review the staff numbers and various skills associated with theupkeep of these various systems. Are there other major IT initiativescurrently underway? Is part of the goal of the project to simply con-solidate and rationalize the many different systems and practicesthat exist throughout the firm?

Remember, too, that much of the success of any e-procurementinitiative is dependent upon a widespread change in employee buy-ing behavior. Ask yourselves if your organization has a maverickbuying culture. Are your purchasing specialists frustrated with hav-ing to complete insignificant but time-consuming administrativeduties while key strategic sourcing and vendor relationship manage-ment duties are left uncompleted?

These types of issues overlap into the realm of change manage-ment and should prompt executives to appreciate some of the keypersonnel issues related to an e-procurement project.

STEP FIVE: DEVELOPING SCENARIOS

By this time in the workshop, many of the group will have alreadyput forward suggestions for change, and it is a good time to beginbuilding high-level consensus around these proposals. Begin bydrawing out several possible scenarios. These might be, for example,

�

Focusing on ORM and MRO with desktop requisitioning

�

Combining in-house systems with partial ASP outsourcingfor catalog maintenance

�

Concentrating on direct procurement first, with full ERPintegration

�

Dividing commodities into strategic and tactical; beginningwith tactical first

�

Investigating auctions and exchanges for commodity pur-chasing and providing central purchasing specialists with portalsubscriptions

With further discussion and refinement, these scenarios willbegin to take logical shape and the group will be in a position to see


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exactly what information is still required before all of the pros andcons of each scenario can be appreciated and a decision on the wayforward reached. Tying each scenario back to the group’s originalguiding principles will help to quickly validate or bring into questioneach broad proposal.

One important question that should be put forward at this timeis, What more, exactly, does the group need to know before any deci-sion on moving ahead can be agreed upon? Although collecting theinformation necessary for this type of business case confirmationshould take place during the analysis and design phases of theproject, it is important that a specific set of tasks be agreed upon bythe group, which will provide the necessary information to make adecision by an agreed-upon time.

STEP SIX: PROJECT READINESS REVIEW

Based on the discussions and scenarios put forward, it is worthwhileto set preliminary milestones for the project. There are some criticalissues to be addressed. What are the recommended timescales for theproject? What tentative dates should be set for key milestones, such as

�

The end of the data collection, verification, and planningphase

�

Systems selection

�

Systems implementation

�

Legacy systems integration

�

Supplier systems integration

�

Transition and training for employees

�

Realization of ROI

Before the executive group breaks up, there are several impor-tant issues that need to be addressed regarding the readiness of theorganization to take on the proposed project. It can help to reviewthe results of any major ERP or business process reengineering(BPR) initiatives that the organization has done in the past that hada similar enterprise-wide effect. Were there cultural or organiza-tional issues that disrupted or mitigated the success of these past ini-tiatives? If so, what does the executive group need to do this time inorder to avoid such disruption?

It is worthwhile polling the executive group to see if they believethe organization is ready to undertake an e-procurement project such


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as the one proposed in the scenarios. Do they believe they have astrong case for action? Does the organization have the committed lead-ership, skills, and resources necessary to successfully execute a major e-procurement effort? What problems do they anticipate, and what doesthe executive group need to do to overcome those problems?

Possibly the most important thing of all, if you decide to moveforward with an e-procurement project, is to make certain to discussand get agreement on the need for a strong program manager whowill be responsible for the overall success of the project. Discuss alsothe probable project structure and the need for the executives to playa continuing active role in the sponsorship and communication por-tions of the initiative. All of these activities are related to a broadprogram of change management, which increasingly needs to be for-malized and incorporated into the project structure.


CHAPTER

Objective

CHAPTER

186

14

Creating an Effective Plan of Change Management

Initiatives that have an IT solution as their core often fail to

appreciate the need for an integrated program of change

management. But change management should never be

seen as a “bolt-on” with important enterprise-wide projects:

�

People issues are the primary obstacle to implementing large-scale projects, and are rated higher among companies complaining of failed initiatives than technology and process issues combined.

�

The best way to ensure that changes to process and work activities really occur is to build change management into the project structure from the outset.

�

The best way to continue to maintain a high level of executive sponsorship is to continue to engage those executives throughout the project.

�

The program manager serves as the single, most knowledgeable liaison between the executives and teams.


187

t is surprising that despitethe fact that an era of

some near-disaster ERPimplementations is justwinding down, many executives still often fail to ensure thatkey project change management tasks are incorporated inthe overall e-business initiative.

Part of the reason for this, I have found from my ownexperience, is that “change management” is a phrase that ringsalarm bells with many of the uninitiated. In part, this is thefault of the very soft, “behaviorist” side of change manage-ment consulting, whose proponents, like psychoanalysts, havepromised much but actually delivered very little true and last-ing business benefit to clients. I have witnessed too manyskeptical executives roll their eyes and exclaim, “We don’t wantany of that soft stuff.” With a poor record of success in “trans-forming” company cultures and teaching organizational lead-ers how to be entrepreneurial, these efforts (unfairly stillgrouped under the heading of change management) have pro-duced a backlash among the many disillusioned clients.

Yet key elements of change management—strongproject management and employee communications plans;redesign of workflow, positions, and responsibilities;restructuring of reporting lines and incentive programs;development of technical and process training regimes; andimplementation of a program for displaced staff—are nei-ther soft nor dispensable.

In fact, a survey by Benchmarking Partners of 62 For-tune 500 companies implementing ERP found that peopleissues were the primary obstacle to implementing ERP andrated higher than both technology and process issues com-bined.

2

It was true of ERP, but it is even more importantwith e-procurement because, ultimately, the success of anyinitiative will be dependent upon broadly changing buyerbehavior among your purchasing staff and employees.

I “I’m all for progress,” explained Mark Twain.“It’s change I don’t like.”1


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As we have seen, there are several predictable areas where enter-prise-wide e-procurement initiatives go wrong. These include:

�

The nonpurchasing departmental executives and companyofficers see the project only as a large investment, exclusivelypurchasing and IT-based, with little or no benefit to theirrespective operational areas.

�

If the e-procurement project is not seen by the executives asbeing strategic to the firm, and if the project lacks overall execu-tive endorsement, there is a risk that the solution will be imple-mented on a piecemeal basis, reflecting traditional functional ordepartmental silos and traditional ways of working.

�

Workflow and positions change planning is not considereduntil after technical systems implementation, which delays realbusiness results.

�

Lack of emphasis on communications (up or down) in theorganization means there is little understanding of what the e-procurement project is intended to achieve, how employees willbe affected, and how the project will benefit the company as awhole.

By contrast, those projects that have gone well have usually hadcommon characteristics:

�

Key executives understand and agree on the goals, approach,and timing of the project.

�

E-procurement is planned and managed as a single, company-wide initiative (even if implemented in smaller pilot projects).

�

The project is coordinated and managed through a strong,participative project management office that provides structure,clarity, integration and direction.

�

The company takes the opportunity of implementing e-pro-curement to clean up purchasing work processes and techniques.

�

Implications on changes to process and work activities areformally captured through an implications analysis, and changeis formally managed through a change transition plan.

�

Enthusiasm is created and resistance reduced through acomprehensive, executive-led communications program.

One of the most important lessons learned in these types of projectsis to make certain that change management is not simply a “bolt-on” toa technical project.

The best way to ensure that changes to processand work activities really do occur is to build change management


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directly into the project structure from the outset, and that can bestbe accomplished by structuring the project so it reflects the empha-sis on business transformation, not just systems implementation.

Making that program of change management integral to the ini-tiative can be done in two ways. The first is to make certain that theproject is structured and staffed in a way that ensures that the neces-sary resources and skills are available and provided with the author-ity and support necessary to be successful. The second is to developan integral plan for change management that incorporates severalkey areas that are far too often omitted with an initiative that hastechnology as its core solution. Let’s first deal with the approach toproject structure and staffing.

PROJECT STRUCTURE AND STAFFING

The Executive Steering Committee

As we have said before, a critical first step in a change managementprocess is enlisting executive support and consensus. The best way tocontinue to maintain that level of sponsorship is to continue toengage those executives throughout the project by having them sit asa steering committee. For a time out of favor, placing a steering com-mittee in charge is worth a word of caution, because as any of us whohas either sat on a steering committee or worked with one in the pastknows, there can be a tendency for the group to micromanage andsecond guess the project team, in ways that are not always best for theproject. Nonetheless, executive understanding and sponsorship is toocritical to have with an e-procurement initiative to allow the projectto move ahead without direct executive participation.

In the end, the key to finding a balance between sponsorship anddomination is usually dependent upon the personality and abilitiesof the program manager/project champion. She or he will ultimatelyneed the political tact, the technical knowledge, and the respect ofthe leadership community to be able to continue to keep the execu-tive officers informed and involved, without allowing them tochoose the all-too-easy option of project by dictate.

E-Procurement Program Manager

E-procurement projects for indirect goods can be difficult, but aremainly straightforward in their goals and design. Many hundreds ofcompanies have already shifted their indirect purchasing online, and


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therefore there is ample evidence of what works and what doesn’twhen it comes to a project approach. Direct is infinitely more com-plex and difficult, but many of the same principles and structuresapply. In either case, there are a number of broad activity categoriesthat need to be completed by someone—either from within theorganization or from the software or consultancy world—in orderfor the project to be successful. These include

�

Soliciting and guaranteeing the necessary levels of sponsor-ship from both company leaders and the supplier community

�

Day-to-day project management

�

Development and execution of the communications plan

�

Completing the implications analysis on changes to people’swork activities and the process, and developing a transition planfor changes to employees’ jobs

�

Both process and technical education and training

�

Technical design and implementation of the software

�

Technical design and implementation of the supporting ITsystems, including integration and communications issues

�

Benefits tracking

The responsibility for overseeing these various tasks will be dif-ferent with each project, but it is important to recognize that some-one needs to be charged with the successful completion of each ofthese broad activity areas, and clarity around that responsibility isessential to success.

As a deputy to the chief executive (or possibly to the chief pro-curement officer, in larger companies), the e-procurement pro-gram manager directs the entire project and has overallresponsibility for making certain that each of the above areas isaccomplished successfully. Constantly reinforcing the coordinated,enterprise-wide project viewpoint, the program manager provideshigh-level day-to-day project management, ensures consistency ofapproach and adherence to project guidelines and milestones, andserves as the highest level liaison for resolving issues with seniormanagement that arise during the project. That means that he orshe is continuously communicating with the executive steeringcommittee, educating and updating the executive sponsors onproject process, and facilitating executive resolution of majorproject issues as they arise. The program manager serves as the sin-gle, most knowledgeable liaison between the executives and the


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teams and is essentially the project “brain trust,” single point ofcontact, spokesperson, and owner of project success.

Technical Program Director

Reporting directly to the program manager, the e-procurement tech-nical program director is responsible for

�

Design and implementation of the software solution

�

Design and implementation of the supporting hardware, com-munications interfaces, data migration, and systems integration

�

Technical end-user training and help desk setup

The technical director therefore oversees the entire investmentin technical infrastructure and should be both a skilled MIS practi-tioner and an experienced IT project manager. He or she will need tohave a good understanding of the procurement process and of vari-ous applications and how they interact. As the central point of con-tact with software vendors, the technical program director willrequire an understanding of broader business goals and the presenceto resist the temptation to “slam in a system” at the expense of over-all business benefits.

Nontechnical Program Director

The nontechnical program director is responsible for all non-ITaspects of the e-procurement project. This broadly encompassesthree main categories: project risk and change management, busi-ness process and job role analysis and change, and business casemanagement.

The nontechnical program director also works closely with theprogram manager and the executive sponsors on the steering com-mittee to help ensure strong and visible executive sponsorship, andis ultimately responsible for creating and overseeing the delivery ofthe employee communications program. He or she also overseesproject “health” and identifies—and is responsible for—resolvingany personal or political issues that arise that might compromise thesuccess of the project. This role also is responsible for deriving anddocumenting the changes to workflow and positions brought aboutby the new process and system (the implications analysis) and forassisting departmental leaders and Human Resources in creating atransition plan for helping employees with education and trainingon nontechnical (process and activity changes) issues. Finally, he or


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she is responsible for applying the “performance indicators” agreedupon by the executive and planning teams, and for building thebusiness case and ROI over the course of the project.

Far too often, organizations assume that anyone dealing in peo-ple or position changes should be from human resources, but that isalmost never the case. Usually a respected leader who is knowledge-able about the procurement process, whoever is appointed to thiscritical role needs to have the political presence, organizationalfamiliarity, and personal tact to manage the most difficult half of theproject—ensuring that the business actually derives a benefit fromthe new systems. Those qualities usually are found in long-servingorganizational mid- to high-level managers who understand howprocurement is done, can appreciate the need for change, are knownand respected broadly, and have a healthy and engaging relationshipwith senior executives (Figure 14.1).

THE CORE TEAM

The core team should be made up of six to eight representativesfrom the key cross-functional areas of the procurement process. ForORM projects, that means requisitioning, supplier management,central purchasing, accounting and finance, MIS, and receiving. Forindirect projects, a much broader input will be needed, includingrepresentatives from inventory management, new product design,forecasting and planning, manufacturing, logistics, and the key sup-plier community. As process experts, these representatives shouldthoroughly understand their own functional areas, and even better,the broad procurement process as a whole. Willing to become advo-cates of the new process and system, they also need to be recognizedleaders in their areas, able to persuade their colleagues of the busi-ness case and to act as an “ambassador” for the project. Unfortu-nately, these are the same people who tend to be invaluable to acompany on a day-to-day basis, but with strong managementendorsement, it should be possible to adjust schedules to ensure thatthese key experts help design the new approach.

Occasionally, because of the issue of job changes, a representa-tive from human resources is invited onto the team, either as a full-time or part-time member. This has its merits, particularly if theorganization is likely to need to negotiate changes in union-agreedroles or levels. However, it is too often assumed that the representa-tive from the human resources department has a broad background


193

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194 E-PROCUREMENT

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in all types of people management issues—including change man-agement experience, organizational alignment, and skills assess-ment. That may or may not be the case, but it is important that theassumption is not automatically made, and that most of the respon-sibility for change management remain with the nontechnical pro-gram manager and his or her assistants.

The core team will usually be augmented by experts from amanagement consultancy or from the software provider or VAR,depending on the phase of the project. It is important, however, thatthis core group of employees sees the project as their responsibilityand that they take a lead in extracting best practices from the con-sultants and software specialists, rather than passively seeing theirrole as merely explaining the current state to outsiders (consultants),who will then create the future direction for their company.

Subject Matter Experts and Supplier Representatives

Not only will you want various subject matter experts on, or at leastavailable to, the core team, but it is often a good idea to also find theworst maverick-buying offenders and have them provide input as towhy non-contract purchasing has been necessary in the past. It isalso, of course, very valuable to get input from some of your mostimportant or most progressive suppliers, concerning the vendorpoint of view.

CREATING A BUSINESS CHANGEIMPLEMENTATION PLAN

A good project plan for any enterprise-wide e-procurement initia-tive should always include a specific plan for enterprise-wide changetransition. There are many variations, but whichever approach youdecide to take, I have found that the approach should adhere to twoguiding principles. First, change management should be integrallyintertwined with the project approach itself, not seen as a separate orparallel program run by organizational or behavioral specialists.Second, the plan should be organized at a level that is comparable tothat of the technical design and implementation plan, with keyactivities, milestones, and deliverables.

A business change transitionplan should be of as much interest—if not more interest—to the execu-tive steering committee as the technical implementation plan.

The bestbusiness change plans that I have encountered usually address, inone way or another, six broad categories:


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195

1.

Communications.

As we have said before, an open andconsistent communication plan, delivered at both theexecutive and operational levels, is crucial to ensuringbuy-in for the project from the organization as a whole.This communication plan should begin with the outputfrom the executive e-procurement workshop, andshould be structured around key themes such as

a. What is happening

b. Why it is happening

c. How it will affect employees

d. When it will happen

e. What employees need to do

f. How employees will be provided further informationand updates

g. How the company will know when it is successful

The key, of course, is to get the right message in the rightformat to the right people at the right time. Admittedly,for some, such a standardized and preplanned approachto communication hints of manipulation, but there neednot be anything underhanded about the message simplybecause employees receive consistent information.Because so many of us have lived through many largeprojects in the past that incorporated a solid approach tocommunications, it may seem to go without saying, butan effective communications plan is absolutely critical tothe success of the project.

2.

Project Risk Management.

This area encompasses manyof the project-related activities normally associated withchange management, including developing a strong,company-wide communications plan, scheduling one-on-one interviews between the program manager, thenontechnical program manager, and various executivesor organizational leaders, identifying and resolving per-sonal conflicts between members of the project team,identifying issues—a recalcitrant or unsupportive execu-tive, union resistance, lack of representation in theproject from a key group—that might put the success ofthe project at risk. Strategies to limit these types of riskmay include communication-related activities such asemployee forums, an e-procurement road show, or eventeam training or “out-of-the-box thinking” events.


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3.

Positions and Structure.

There will be many key struc-tural changes that will occur to the procurement processas the company shifts from manual to electronic and fromcentralized to employee-initiated purchasing. Mostimportantly, this area includes making certain that theimplications analysis is completed in conjunction with thesystems design, and identifying changes to the process andjob positions of current procurement staff. It also involves

a. Prototyping new job descriptions

b. Identifying new skill level requirements

c. Conducting a skills inventory of current staff

d. Defining the staffing redeployment plan

4.

Training and Development.

As with all employee desk-top systems, at least with indirect materials purchasing,it will be necessary to provide training to the employeeend users on the software and approach to desktop req-uisitioning. Such training courses are often provided bythe software vendor, but will need to be coordinated and,at times, modified to reflect your company’s purchasingpolicies. For those employees whose jobs are displacedby the system, it will be necessary to create new trainingcourses that will help them to update their skills andcope with the change.

5.

Performance Management.

Identifying and beginningto record meaningful and accurate performance mea-sures is critical to the success of an e-procurement initia-tive. Not only do these figures become part of thebusiness justification process, but in the future will beused to help build an accurate, real-time view of bothsupplier and procurement process performance.

6.

Rewards and Recognition.

Finally, remembering thatthe effectiveness of desktop requisitioning comes in largepart from adherence to rules concerning standardizedbuying policies, it is often important to identify specificguidelines for purchasing goods and to create specificincentives for adhering to them.

ENDNOTES

1. Quotation attributed to Mark Twain.2. Corini, John, “Integrating e-Procurement and Strategic Sourcing,”


March 2000, p. 7.



E-PROCUREMENT

Index

199

Page numbers in italics refer to illustrations.

A

Aberdeen Group, 17, 18, 62Access Certificates for Electronic Services

(ACES), 135accounts payable, automation of, 49ACES (Access Certificates for Electronic

Services), 135ACORD, 103Advanced Planning and Scheduling (APS)

systems, 32explanation of, 39improving purchasing processes, 36, 68

Advanced Purchasing Studies, 91Aerospan, 117Affordable Interior Systems, Inc., 90Aircraft Engines, 115–16Amazon.com, 82American Airlines, 122American Express, 66, 105American Express Corporate Purchasing Card,

71AMR Research, 5, 6, 139Andersen Consulting, 65antitrust legislation, 85Application Service Providers (ASPs), 65

explanation of, 64, 93–95outsourcing services, 95, 124, 173, 174

approval processautomation of, 38, 48–49e-procurement and, 33length of, 30

APS (Advanced Planning and Scheduling) systems, 32

explanation of, 39improving purchasing processes, 36, 68

Ariba, 62cXML protocol, 103, 105e-procurement integration, 67–68, 71, 123enterprise suite, 65, 66, 112–13, 124, 133as horizontal exchanges, 86third-party software and, 69

Aspect Development, 65, 68ASPs (Application Service Providers), 65

e-procurement services, 95explanation of, 64, 93–95outsourcing services, 95, 124, 173, 174

asset management, 50Atlas Services, case study, 56–57auctions, online, 8–9, 64, 82, 88–93

advantages of, 89, 92, 129case study, 90

drawbacks of, 92–93explanation of, 88–89fees for, 89indirect materials and, 82reverse auctions, 91vendors and, 125

audit trail, 33, 50, 55Autolink.com, 94automation process, 38Automotive Rentals, Inc., 104AviationX, 117

B

B2B (business-to-business) e-commerce, 2–20cost savings, 5–8e-procurement and, 4–5, 41forecasts by region,

5

government and, 110growth of, 5impact of, 5–7manufacturing sector, 5nature of, 7–11potential of, 3

B2B Integrator, 69B2C (business-to-consumer) e-commerce, 5Baan, 67, 106, 123back-end systems, 32, 39–41

costs of, 133integration of, 97–98

BAE Systems, 116Bank of America, 72, 112Bank of Ireland, case study, 18BASF, 84Bayer, 84benchmarking, 181Benchmarking Partners, 187BFGoodrich, case study, 87Bidradar.com, 111BidtheWorld.com, 91billing, automation of, 49BizTalk, 71, 105blue collar MRO, 26–27.

See also

MRO (Maintenance, Repair, and Operations)

Boeing, 105, 116BPR (business process reengineering), 184“bricks and mortar” organizations, 4, 41British Petroleum, 84British Telecom, 4, 11, 17Broadlane, 124Broadvision, 65bulk-buy direct materials, 122business case management, 181–83, 191–92business process reengineering (BPR), 184

INDEX

index.fm Page 199 Thursday, April 19, 2001 10:36 AM

200 E-PROCUREMENT

Index

business processes, redesigning, 148–50, 169business redesign, 170–72business strategy, 42, 144–45.

See also

e-procurement strategy workshop

business-to-business e-commerce.

See

B2B (business-to-business) e-commerce

business-to-consumer (B2C) e-commerce, 5business vision, 180–81buy-side central procurement, 79–80buy-side one-to-many model, 77–80,

78

buy-side requisitioning, 79buyer-seller relationship, 59, 134–37BuySite, 66

C

Cargill, 85Carrefour, 84Casino, 84catalogs, online

access to, 86buyer-managed, 79creation of, 62explanation of, 32–33, 48–49maintaining, 76

Cenex Harvest, 85Center for Advanced Purchasing Studies, 15change management

communication and, 195core team, 192–94directors and, 191–92, 194executive support, 183, 189experts on, 192–94key elements of, 147–48, 187managers and, 167–68, 185, 189–91, 195performance measures, 192, 196plans for, 177, 186–96recognition, 196risk and, 191, 195–96staffing, 147, 171, 189–92, 196structure and, 189–92,

193

, 196training, 196

Chartered Institute of Purchasing and Supply, 13

Chemdex, 98, 124Chevron, 11China Trade World.com, 114Cisco Systems, 95, 105Clarus, 65, 72, 95, 134click-and-order technology, 50client-server technology, 10CMM (Computerized Maintenance

Management), 50, 67Commerce One, 62

e-procurement integration, 67, 123electronic payments and, 72enterprise suite, 65, 66, 84, 112–13, 133

as horizontal exchanges, 86xCBL protocol, 103, 105

Commerce XML (cXML), 71, 103, 105CommerceNet, 105communications, 195Compaq, 84competitive forces, 15, 58, 125, 181compliance, 46, 47, 50–54Computerized Maintenance Management

(CMM), 50, 67Concur Procurement, 79Concur Technologies, 65, 79connectivity, 69–71, 96

standards for, 100–106, 119connectors, 69,

70

, 71, 96.

See also

enterprise suites; third-party software

ConnectTrade, 66consultants, 152–58, 194contract management, 59Corini, John, 151cost savings, 5–8

e-procurement and, 36, 42, 47–48, 130in government spending, 47–48, 109in transactions, 16–19, 25–26

cost tracking, 19, 33Covisint, 9–10, 84, 110CRM (Customer Relationship Management),

10, 64explanation of, 65systems for, 69

cross-industry organizations, 85cross-industry standards, 103–4Curry, Carl, 91Customer Relationship Management (CRM),

10, 64explanation of, 65systems for, 69

customer support, 175CVS, 84cXML (Commerce XML), 71, 103, 105

D

Daimler-Chrysler, 9, 84Dana Corporation, 9Data Interchange Standards Association

(DISA), 103decision support tools, 50, 54, 55, 59defense procurement, 115–17Dell, 11Deloitte Consulting, 9, 12, 18, 151Digital Certificate Technology, 135digital certificates, 135digital signature, 135–36direct materials, 25–31

automation system, 54, 126e-procurement and, 33, 39, 75, 86, 120


E-PROCUREMENT

Index

201

purchasing and, 25–26, 31suppliers of, 137

DISA (Data Interchange Standards Association), 103

displaced staff, 147Document Type Definition (DTD), 102–3dotcom era, 3, 4, 41Dow, 84Drugstore.com, 4DTD (Document Type Definition), 102–3Dunn & Bradstreet, 32DuPont, 84, 85

E

e-commercecompared to B2B e-commerce, 5, 41government and, 108–17investments in, 3–4profitability of, 4

e-fulfillment services, 64.

See also

fulfillmente-government, 110–14.

See also

governmente-marketplaces, 8–9

ASP-hosted, 88, 94–95drawbacks to, 95examples of, 82–86fees for, 134future of, 95–99, 119–20growth of, 64,

81

, 82strategic sourcing and, 125

e-procurement, 124.

See also

e-procurement project; e-procurement strategy workshop

benefits of, 35, 38–39, 42–44, 54, 129–31, 145–47, 150

cost savings, 5–8, 16–19, 36, 42, 47–48, 130costs of, 133–34, 145–47data transmitted, 134–35distribution companies and, 13–14, 126drawbacks of, 131–38education on, 180efficiency of, 8evolution of, 60examples of,

34

,

52–53

,

56–57

, 86,

87

explanation of, 2failure of, 138–39, 188fulfillment and, 41, 64future of, 32–35, 118–26government and, 108–17hesitancy to implement, 13–15history of, 61–64key points of, 118manufacturing companies and, 12–14, 126nature of, 36–44potential of, 5–6pros and cons, 128–39purpose of, 43–44

roles of,

58

security issues, 14, 134–37software functionality,

122

software specialists and, 65–71,

70

, 123, 124solutions for, 122–25strategy for, 12, 14, 15, 161–64, 176–85subscription services, 134trends in, 118

e-procurement project.

See also

e-procurement; e-procurement strategy workshop

analysis phase, 169–72business strategy and, 144–45change management and, 147–48, 167–68,

171, 177, 183.

See also

change management

clarity of, 165–66concerns, 167–68costs of, 172–73customer support, 175design phase, 169–72disagreements during, 165employee participation, 167–68, 170–72failure of, 138–39, 188functionality of, 173goals, 164–65, 180–81guidance, 140–58implementation of, 142, 143, 144, 148–50,

174–75information gathering, 169key issues, 163, 164participation in, 143–44, 151–52, 170–72performance measures, 165–66, 179phases of, 160–75,

162

planning phase, 164–68principles for, 147, 164–65, 170, 179readiness review, 184–85resources for, 167–68rules for, 142–43software viability, 175strategy phase, 161–64structure of, 160–75, 189–92,

193

, 196supplier relationships, 134–37, 166–67, 181,

183supplier support, 151–52, 169system selection phase, 172–74team members, 171–72, 192–94timeline for, 167–68, 184–85workshops, 163–64, 167–68, 176–85

e-procurement strategy workshop, 161–64, 176–85

business vision, 180–81communications, 195education, 180examining procurement process, 181–83executives and, 176–78


202 E-PROCUREMENT

Index

e-procurement strategy workshop (

continued

)fundamentals of, 178–80issues, 181–83scenarios, 183–84steps of, 178–85

EAI (Enterprise Application Integration), 123EAM (Enterprise Asset Management), 94eBay, 82eBreviate.com, 91eCO Framework X, 105

Economist, The

, 6EDI (Electronic Data Interchange) systems, 12,

30explanation of, 37, 61–62transactions, 101–3

EDS, 105education, 180, 196EFDEX, 98electronic auctions, 8–9, 64, 88–93

advantages of, 89, 92, 129case study, 90drawbacks of, 92–93explanation of, 88–89fees for, 89indirect materials and, 82reverse auctions, 91vendors and, 125

electronic catalogsaccess to, 86buyer-managed, 79creation of, 62explanation of, 32–33, 48–49maintaining, 76

Electronic Data Interchange (EDI) systems, 12, 30

explanation of, 37, 61–62transactions, 101–3

electronic payments, 71–72electronic signature, 135–36electronic trading communities, 64, 66–67, 86.

See also

trading hubsbenefits of, 74growth of, 80–82participants in, 84

employee participation, 167–68, 170–72encryption issues, 134–37Enterprise Application Integration (EAI), 123Enterprise Asset Management (EAM), 94Enterprise Resource Planning (ERP) suppliers,

67–69Enterprise Resource Planning (ERP) systems,

10, 12, 15benefits of, 32, 33e-procurement support, 50, 67–68, 132–33government agencies and, 115importance of, 39

initial use of, 39–41materials management, 14, 123obstacles to implementing, 187purchasing processes and, 36, 77–78

enterprise suites, 65–66.

See also

third-party software

costs of, 133–34examples of, 112–13, 124

enterprise-wide project, 142–44, 148–50,

162

ERP (Enterprise Resource Planning) suppliers, 67–69

ERP (Enterprise Resource Planning) systems, 10, 12, 15

benefits of, 32, 33e-procurement support, 50, 67–68, 132–33government agencies and, 115importance of, 39initial use of, 39–41materials management, 14, 123obstacles to implementing, 187purchasing processes and, 36, 77–78

Essential Markets.com, 94Etoys, 4EU (European Union), 109, 113–14EUR, 113Europe, 12–13European Union (EU), 109, 113–14exchange companies, 84–88

failure of, 97–98executive workshop, 176–85.

See also


Exostar, 116experts on procurement process, 192–94extended enterprise, 38–39, 41Extensible Markup Language (XML).

See

XML (Extensible Markup Language)

Extricity, 65, 69

F

Federal Express, 11, 105Fedmarket.com, 111Ford, 9, 84, 105Forrester Research, 12Free Trade Zone, 89FreeMarkets Inc., 91FreeMarkets.com, 92frpMarket.com, 91fulfillment

automation of, 123components of,

10

e-procurement and, 41, 64efficiency of, 10–11management of, 49

fundamentals of e-procurement strategy, 178–80


E-PROCUREMENT

Index

203

G

Gartner Group, 5, 98, 111, 133, 172Gateway, 84GE (General Electric), 115–16GeBIZ portal, 114–15General Electric (GE), 115–16General Motors (GM), 9, 84Georgia Pacific, 85Global Trading Web, 67GlobalNetXchange, 84, 110GloMediX, 114GM (General Motors), 9, 84goals, 164–65, 180–81Goldman Sachs, 5–6GovCon.com, 111government

cost savings, 108–9, 126defense procurement and, 115–17e-procurement and, 108–17electronic services, 110–12endorsement by, 110, 126

Government Contracting Group, 112government-to-business e-commerce, 111–15Grainger.com, 86, 87, 95

H

health care, 113–14, 124Hewlett-Packard, 84Hitachi, 84Honeywell, 117horizontal e-markets, 76, 85–88

I

i2 Technologies, 67–69, 124IBM, 17

e-procurement integration, 67–69, 96, 124platform integration, 103

ICL, 150INC2inc, 124independent buying, 29, 32–33, 46, 48

costs of, 50–51reducing, 54, 79, 129, 134

independent portals, 80–82,

81

indirect materials, 25–31automation system, 54, 79costs, 27–29, 51e-procurement and, 33, 38, 48, 75, 86, 120purchasing and, 51suppliers of, 137

IndustrialVortex, 98, 124industry portals, 64Information Systems (IS), 138information technology (IT) systems

e-procurement and, 38, 39, 137–38, 182project managers, 191

Ingram Micro, Inc., 111

integration issues, 131–33, 150–51Intelisys Electronic Commerce, 65, 66, 94, 112International Paper, 85Internet, 2, 13

EDI and, 62, 63number of users, 7

Internet Business Exchange, 66inventory

automation of, 50, 123excess, 11, 30–31, 33vendors, 146

investment costs, 133–34investors, 4invoicing, 49IS (Information Systems), 138Isadora, 124IT (information technology) systems

e-procurement and, 38, 39, 137–38, 182project managers, 191

J

J. D. Edwards, 67Just-In-Time (JIT) delivery, 11, 31–32

K

Killen & Associates, 14Kmart, 84Kwelty, Bill, 104

L

leverage, 46, 47, 54–55Lockheed Martin, 116Lotus, 69Lucent Technologies, 105

M

M2MEport.com, 94Maintenance, Repair, and Operations.

See

MRO (Maintenance, Repair, and Operations)

Manugistics, 68, 69many-to-many model, 63–64, 66, 75market creators, 9, 83–85, 122MarketLink, 124MarketSite, 66, 133Marks & Spencers, 84MasterCard, 71Material Requirements Planning (MRP), 67materials, direct, 25–26, 31materials, indirect, 25–31materials, selecting, 29maverick buying, 29, 32–33, 46, 48


Meredith, Tom, 11Metiom, 65, 94


204 E-PROCUREMENT

Index

Metiom (

continued

)e-procurement integration, 68enterprise suite, 66

Microsoft, 11, 17case study, 52–53e-procurement and, 69, 95electronic payments and, 72platform integration, 71, 103, 105

military purchasing, 108, 109, 115–17, 126mission-critical data, 134–35mission-critical materials, 26–27, 120MRO (Maintenance, Repair, and Operations),

24, 26–31automation system, 54comparisons,

28

e-procurement and, 38, 75, 120, 122horizontal trading, 86inventory, 50for military, 115versus ORM (Operating Resource

Management), 26–29products, 62

MRP (Material Requirements Planning), 67MS Market, 52–53, 69MyAircraft, 116–17

N

National Association of Purchasing Management, 71

NEC, 84Neoforma, 98Neon, 69Net Market Makers, 9Net Profit, 13Network Platform, 66network platforms, 66NIC Commerce, 72, 112noncontract buying, 50–51nontechnical program director, 191–92, 194Numetrix, 68

O

OAGI (Open Applications Group, Inc.), 69, 103, 105

OBI (Open Buying Initiative), 105off-contract buying, 29, 32–33, 46, 48


Office Depot, 86Office of Federal Procurement Policy, 112OIF (Open Integration Framework), 69one-to-many model, 63–64, 66

buy-side focus, 75, 77–80,

78

direct materials and, 122future of, 119–20sell-side focus, 75–77,

76

online auctions, 8–9, 64, 88–93advantages of, 89, 92, 129case study, 90drawbacks of, 92–93explanation of, 88–89fees for, 89indirect materials and, 82reverse auctions, 91vendors and, 125

online catalogsaccess to, 86buyer-managed, 79creation of, 62explanation of, 32–33, 48–49maintaining, 76

online ordering, 13–14online retailing, 3, 4.

See also

e-commerceonline stores, 76online trading communities, 64, 66

benefits of, 74, 86growth of, 80–82participants in, 84

online trading portals, 111–12.

See also

portal-based trading communities

online users, number of, 7Open Applications Group, Inc. (OAGI), 69,

103, 105Open Buying Initiative (OBI), 105Open Integration Framework (OIF), 69Operating Resource Management.

See

ORM (Operating Resource Management)

Oraclee-procurement and, 67, 68platform integration, 69, 115, 123

OracleExchange.com, 68order fulfillment

automation of, 123components of,

10

e-procurement and, 41, 64efficiency of, 10–11management of, 49

order processing costs, 8ordering online, 13–14OrderZone.com, 86, 95Organization for the Advancement of

Structured Information Standards, 105ORM (Operating Resource Management), 24,

26automation system, 54, 79comparisons,

28

e-procurement and, 75, 122versus MRO (Maintenance, Repair, and

Operations), 26–29products, 62purchasing costs, 51


E-PROCUREMENT

Index

205

ORMS (Operating Resource Management Systems), 66, 71

outsourcing, 79–80, 95, 124, 173–74

P

parsers, 101–3PartnershipAmerica.com, 111password protection, 136payment systems, 71–72Pendarvis, Isaac, 87PeopleSoft

e-procurement and, 68platform integration, 67, 69, 106, 115, 123

performance measures, 165–66, 179, 192, 196PKI (Public Key Infrastructure) technology,

135–36platform integration, 69.

See also


problems with, 132single source for, 97–98, 122–25third-party software, 96, 124

Platzman, Bruce, 90point-and-click system, 32–33point of sale (POS) vendors, 69portal-based trading communities, 64, 66, 80–

82, 111–12portals, independent, 80–82,

81

POS (point of sale) vendors, 69PriceWaterhouseCoopers, 12, 14, 85process automation savings, 48–50process efficiencies, 46, 47–55procurement.

See also

e-procurement; e-procurement strategy workshop

approach to, 29–31automation of, 48–49changes in, 137–38costs of, 12, 13, 15–17, 25–27direct materials, 25–26, 31examining, 181–83experts on, 192–94fundamentals of, 24–35indirect materials and, 25–31information systems, 32savings in, 32

procurement-related activities, 15procurement specialists,

58

, 58–59, 125–26, 147–48

ProcureNet, 65ProcureWorks, 67production costs, 9–10productivity, 10profit, 10program directors, 191–92, 194program managers, 185, 189–91, 195project readiness review, 184–85Promedix, 98

Public Key Infrastructure (PKI) technology, 135–36

purchase orderscreating, 30–31electronic, 48–49processing costs, 34

purchasing agents, 126purchasing cards, 71,

72

, 87, 146purchasing costs, 8, 15, 51purchasing officers, 59purchasing specialists, 129purchasing strategies, 58–59purchasing transactions, 25–26

analyzing, 145–46automation of, 123improving, 131length of, 30–31organizing, 32

Purdue University, case study, 72

Q

Quaker Oats, 91, 92

R

Raytheon Systems, 17, 116Remedy, 65Renault-Nissan, 9, 84reporting tools, 54–55Request for Proposals (RFPs), 146Request for Quotes (RFQs), 90Request for Tender (RFT), 88–89, 146Requisite Technology, 80requisition process, 30

automation of, 38, 48–49, 79e-procurement and, 33, 34, 129, 134

retailing, online, 3, 4.

See also

e-commercereturn on investment (ROI), 11

investment costs and, 15, 19, 132, 172overseeing, 192requisitioning software and, 79skepticism and, 147subscription services and, 134transaction costs and, 18

reverse auctions, 91rewards, 196RFPs (Request for Proposals), 146RFQs (Request for Quotes), 90RFT (Request for Tender), 88–89RFT (Request For Tender), 146risk management, 191, 195rogue buying, 29, 32–33, 46, 48


ROI (return on investment), 11investment costs and, 15, 19, 132, 172overseeing, 192


206 E-PROCUREMENT

Index

ROI (

continued

)requisitioning software and, 79skepticism and, 147subscription services and, 134transaction costs and, 18

Rooster.com, 85RosettaNet, 103, 105

S

Sabre Reservation, 122Safeway, 84sales, expanding, 130Samsung, 84SAP

e-procurement and, 123platform integration, 67, 106, 115third-party software and, 69

SAP R/3, 52SAPMarkets, 71SAS Institute, 55SAS Solution’s Supplier Relationship

Management System, 32scenarios, developing, 183–84SciQuest, 89Sears, 84secure certificates, 135secure file transfers, 103security issues, 14, 134–37self-service procurement system, 51, 59sell-side one-to-many model, 75–77,

76

sensitive procurement transactions, 136SGML (Standard Generalized Markup

Language), 102Shell, 84Shepherd, Jim, 139shipping and receiving, 38.

See also

fulfillment“Shocking Economic Effect of B2B, The,” 6shopping malls, 64, 75–77Simap system, 113single-solution suppliers, 97–98, 122–25smart cards, 135Smartmission, 114Smith, Jim, 57SmithKline Beecham, 91, 92Society for Worldwide Interbank Financial

Telecommunications (SWIFT), 103software specialists, 65–71,

70

benefits of, 152–53platform integration, 123–24

software suites.

See


staff responsibility, 170–72, 190staffing changes, 147, 189–92, 196stakeholders, 180Standard Generalized Markup Language

(SGML), 102

storefront models, 75–77strategic planning, value of, 163–64strategic sourcing, 55–59, 66

explanation of, 96–97understanding, 181–83vendors and, 125, 183

structuring e-procurement projects, 160–75.

See also

e-procurement projectsubscription services, 134Sun Microsystem/Netscape, 65, 103supplier-buyer relationships, 134–37, 166–67,

181, 183Supplier Market.com, 65SupplierMarket.com, 86, 90, 91suppliers.

See also

vendorsparticipation of, 151–52relationships, 134–37, 166–67, 181, 183support from, 151–52, 169

supply chain materials, 13supply chain procurement, 13, 14

automation of, 36–39, 67–69supply chain relationships, 12, 15supply chain software, 32, 124.

See also

enterprise suites; vendors

supply chain systems, 10–11, 123–26SWIFT (Society for Worldwide Interbank

Financial Telecommunications), 103SynQuest, 68system selection, 172–74system-to-system integration issues, 131–33,

150–51

T

Talsi, Mikko, 150TanData Corp, 66Target, 84team-based purchasing, 59team members, 171–72, 192–94technical program director, 191technology curve,

7

technology, expansion of, 7Tesco, 84Texas Instruments, 11third-party hosts, 63–66, 93,

94

future of, 119–20third-party software, 65–66.

See also

connectors; enterprise suites

competition,

70

connectivity and, 69, 71platform integration, 96, 124

3M Corporation, 8, 34tier-one vendors, 9, 12total procurement information systems, 32TPN Marketplace, 34TPN Register, 34tracking capabilities, 38, 50


E-PROCUREMENT

Index

207

tracking costs, 19, 33Tradeair, 117TRADEC.com e-procurement system, 56–57TradeMatrix, 67, 124TradeMatrix Procurement Services, 68Tradeum, 124trading communities.

See

electronic trading communities; trading hubs

trading hubs, 64.

See also

electronic trading communities

fees for, 88, 134platform integration, 86, 95–96vendor rationalization, 125

training, 180, 196transactions, 25–26

cost savings, 16–19, 25–26, 101–3, 145–47fees for, 88in purchasing, 30–32, 123, 131security of, 135–37simplification of, 86time required, 35

Trilogy, 65Trilogy Software, 133

U

U. S. Department of Defense, 115, 116, 136U. S. Department of the Treasury, 135United Kingdom, 13, 141United Technologies, 11, 92, 117UPS, 66Usinternetworking, 134

V

value-added reseller (VAR), 174, 194value-added services, 125–26Van Keulen, Kathy, 34VAR (value-added reseller), 174, 194VEBA Electronics, 56Vendor-Managed Inventory (VMI), 12vendors.

See also

suppliersinventory, 146online catalogs, 32–33participation, 151–52rationalization, 55, 58, 125relationships, 134–37, 166–67, 181, 183software specialists, 65–71,

70

support from, 151–52, 169tier-one, 9, 12

Ventro, 98, 124

vertical e-markets, 76, 82–85advantages of, 85examples of, 82–83explanation of, 82–83forecasts by industry,

83

integration of, 120–22, 124shakeouts, 98

VerticalNet, 111, 124Visa USA, 71Visio, 79VMI (Vendor-Managed Inventory), 12Volpe Brown Whelan & Company, 82

W

W. W. Graingercase study, 87e-procurement, 86, 130procurement spending, 12, 13, 15return on investment (ROI), 18

Wall Street Journal

, 17Web-based procurement, 74–99Web-based technology, 10Web sites, 4, 41WebMethods, 69, 124WebSphere Commerce, 67, 124Weyerhauser, 85white collar ORM, 26–27.

See also

ORM (Operating Resource Management)

Williams, Lisa, 26Wood River Technologies, 111workshops, 163–64, 167–68, 176–85.

See also


World Wide Web, 7WorldWide Retail Exchange, 84

X

xCBL (XML Common Business Library), 103, 105

XML (Extensible Markup Language), 100–106connectivity and, 69, 71, 119, 123example of,

104

explanation of, 100, 102–3formats, 77, 94product suite, 124

XML Interoperability Bus Architecture, 105XML.cor, 105

Y

Yankee Group, 26


Documents

E-Procurement From Strategy to Implementation